Time Frame

• The Internal Revenue Service considers any withdrawal made before you turn 59-1/2 to be an early withdrawal. In addition, if you have a Roth IRA, the account must have been open for at least five tax years or the distribution will be considered an early withdrawal. The tax age of a Roth IRA is counted from Jan. 1 of the tax year the contribution was made. For example, if you made your first Roth IRA in the 2011 tax year, the age would be counted from Jan. 1, 2011, regardless of the actual date of the contribution.
  
  

Taxable Amount

• If you are taking an early withdrawal from a tax-deferred IRA, the entire amount will be taxable because you received tax deductions for your contributions. If you are taking an early withdrawal from a Roth IRA, only the amount by which your distribution exceeds the amount of contributions made to the account will be taxable. For example, if your Roth IRA has $20,000 of contributions and $10,000 of earnings and you took an early withdrawal of $25,000, only $5,000 would be taxable.
  
  

Penalties

• The taxable portion of your early withdrawal from your IRA is also subject to a 10 percent tax penalty on top of any income taxes you owe on the withdrawal. This penalty increases to 25 percent if you are taking a withdrawal from a SIMPLE IRA within two years of the SIMPLE IRA being opened.
  
  

Exceptions

• The IRS does permit several exceptions for avoiding the 10 percent early withdrawal penalty. However, even if an exception applies, you must still pay income taxes on the withdrawal. If you become permanently disabled, the penalty is waived. You can also take out money early without penalty for higher educational expenses, up to $10,000 for your first home, and an amount equal to your medical expenses that exceed 7.5 percent of your adjusted gross income.
  
  

Reporting

• When you take an early withdrawal, you must file your taxes using form 1040 and attach form 5329. Form 5329 is used to either calculate your early withdrawal penalty or to document your exemption from the penalty. If you have an exception, write the code next to line 2 and the amount of the exemption on line 2. If you end up owing a penalty, you must report it on line 58 of your form 1040 tax return.