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According to the Internal Revenue Service (IRS), a traditional individual retirement account (IRA) is a savings account that provides tax advantages for retirement savings. Account deposits aren't taxable until the money is distributed. Money can be withdrawn, without penalty, after the age of 59 ½. If an IRA is "cashed out" before this point, it may be subject to penalties, according to the IRS.
Cash Out for Education Expenses
According to Bank Rate, IRA account holders interested in cashing out traditional IRAs to cover educational costs, don't face a penalty. To take advantage of this benefit, the account holder must choose a qualifying educational institution. If a school qualifies for the federal student aid program, they're within the IRS rules. Qualifying costs include tuition payments, books and boarding experiences.
Cash out to Purchase a Home
The IRS has also created an exception for purchasing your first home. According to Bank Rate, $10,000 of your IRA can be cashed out (without penalty) towards the purchase of a first home. Even better, if a couple is purchasing a home together, they can each withdrawal $10,000, for a total of $20,000, towards the purchase of a home. IRA funds can also be used to help a parent, child or grandchild purchases a first home. However, don't withdrawal funds too soon. Failure to use IRA funds within 120 days of withdrawal may result in being assessed a penalty.
Cash out for Hardship Expenses
The IRS also provides a waiver of penalties if the withdrawal is made because of financial hardship. Excessive medical expenses, paying health insurance while unemployed and permanent disability qualifies under the hardship status. Be prepared to provide documentation proving financial hardship. Also, if the account holder dies, the account may be distributed without a withdrawal penalty.
Cashing Out for Unqualified Expenses
If you don't qualify for an early withdrawal penalty exception, don't worry, you can still withdrawal IRA funds. There are penalties, however, for cashing out your IRA. According to the IRS, early distributions are taxed at 10 percent. When withdrawing funds, the financial institution will withhold the tax amount before cutting a check.
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