Are you thinking about taking money out of your IRA to pay off those bills that keep mounting up? If so, please call your Enrolled Agent first and be sure you understand how it is going to impact your taxes.
Each tax season, I end up sitting across from a client who hands me a 1099-R showing that they took an early distribution from their IRA. They start fidgeting as they wait to hear what their tax liability is going to be….. hoping beyond hope that they do not have a big tax bill this year.
An early distribution is when you take money out of your IRA before you have turned 59-1/2 years old. The impact of taking money out early is (1) you have to pay taxes on the distribution (2) you have to pay a 10% federal penalty and a 2.5% California penalty on top of the taxes (3) the distribution raises your adjusted gross income so that may push you into a higher tax bracket and you may phase out of deductions & credits you usually get, and (4) you no longer have retirement savings. (Wow… the government really doesn’t want you to take an early distribution, do they!)
There are a handful (and we do mean just a few) circumstances where you can take money out of your IRA without paying the penalty. These circumstances include high medical bills, buying your first home or paying for college.
So, if you are thinking of taking money out of your IRA, call your Enrolled Agent first. We want to be sure you are fully informed and prepared for the tax impact of that distribution.