• Taxes and penalties await premature IRA withdrawals.tax forms image by Chad McDermott from Fotolia.com
  
  IRAs, or individual retirement accounts, assist people in saving for retirement. The plans provide tax benefits and can be opened by individuals without involving their employer. Though the Internal Revenue Service does not prohibit withdrawals before retirement, early withdrawal penalties and taxes may be imposed on premature distributions.
  
  

Definition of a Premature Withdrawal

• A premature withdrawal from a traditional IRA occurs when the account holder takes money out of the account before he reaches the age of 59 1/2. Roth IRA premature withdrawals occur when the account holder takes a withdrawal before the account holder turns 59 1/2 and the account reaches an age of 5 years. However, the age of the account must be calculated from Jan. 1 of the first tax year a contribution was made, regardless of when during that tax year the contribution was made.
  
  

Penalties for Premature Withdrawals

• The IRS imposes a 10 percent penalty on the taxable portion of the premature IRA withdrawal. For traditional IRAs, the entire amount is taxable because the contributions are tax-deductible. For Roth IRAs, only the portion of the withdrawal that comes from returns on the contributions will be taxable because the contributions are made with after-tax dollars. All the contributions in a Roth IRA are removed before any earnings come out.
  
  The IRS waives the penalty on the taxable portion of the premature withdrawal in certain circumstances including a permanent disability, medical expenses above 7.5 percent of the account holder's adjusted gross income, college or vocational school expenses or up to $10,000 for the purchase of a first home. For Roth IRAs only, if the account has been open for at least five years, the withdrawal of earnings is also tax-free if the money is used for a permanent disability or for a first-time home purchase.
  
  

Reporting of Premature Withdrawals

• For traditional IRAs, premature withdrawals require the account holder to complete form 5329 to calculate the penalty on the withdrawal or to document the reason for the penalty being waived. The total amount of the withdrawal must be reported as taxable income on the account holder's tax return.
  
  For Roth IRA premature withdrawals, first taxpayers must complete form 8606 to calculate how much of the withdrawal comes from contributions and how much comes from earnings. If the entire withdrawal comes from contributions, the taxpayer does not have to complete form 5329 and reports the amount of the withdrawal as a nontaxable IRA distribution. If earnings are included, the taxpayer must complete form 5329 to calculate the penalty or document the reason for the exemption. The penalty and any taxable earnings must be reported on the form 1040 tax return.