• The IRS imposes penalties on early IRA withdrawals.tax forms image by Chad McDermott from Fotolia.com
  
  The Internal Revenue Service allows significant tax benefits for IRAs, or individual retirement accounts. Tax-deferred IRAs, including traditional IRAs, SIMPLE IRAs and SEP IRAs offer tax deductions for contributions. Roth IRAs allow money to be withdrawn tax-free at retirement. However, the IRS imposes taxes and penalties on early withdrawals. For tax-deferred IRAs, early withdrawals are any withdrawals taken before reaching age 59 ½. For Roth IRAs, early withdrawals include any withdrawal taken before age 59 ½ and before the account has been open for at least five tax years.
  
  

Early Withdrawal Taxes

• The portion of your early IRA withdrawal that is taxable depends on what type of IRA from which you are taking the early withdrawal. With tax-deferred IRAs, the entire amount of the distribution is taxable. With Roth IRAs, only the portion that comes from earnings is taxable. Contributions come out of Roth IRAs first, so you will only have to pay taxes on your early withdrawal if the amount exceeds the amount of contributions in your account. With a Roth IRA early withdrawal, you must use form 8606 to determine how much of your withdrawal comes from contributions and how much comes from earnings. Any taxable early IRA withdrawals are included as ordinary income, so the tax rate applied to the withdrawals depends on what your tax bracket is for that year.
  
  

Early Withdrawal Penalties

• The IRS imposes a 10 percent early withdrawal penalty on the taxable portion of your early IRA withdrawal. For tax-deferred IRAs, this is the entire amount. For Roth IRAs, the 10 percent penalty applies only to the early withdrawal of earnings. This is a one-time penalty paid in the year of the early distribution. If you take an early withdrawal from a SIMPLE IRA within two years of opening the plan, the penalty is 25 percent rather than 10 percent. The amount of your early withdrawal penalty is figured using form 5329.
  
  

Early Withdrawal Exceptions

• The IRS does permit several exceptions to the early withdrawal penalty. If you become permanently disabled, the penalty does not apply. In addition, if you have had your Roth IRA open for at least five years, the earnings that you withdraw are also tax-free. The same rules apply for the first-time home buyer exception that allows you to withdraw up to $10,000 for the costs of purchasing a first home. Early withdrawals for high medical expenses and higher education costs are also exempted from the 10 percent penalty, but Roth earnings must still be included in your taxable income, even if your account has been open for at least five years.