Types

• There are two primary types of individual retirement accounts: traditional IRAs and Roth IRAs. Traditional IRAs allow the taxpayer to deduct their contributions from their taxable income when they file their income tax return. Funds in the account grow tax-deferred until they are withdrawn, usually after the account holder reaches retirement age and is presumably in a lower marginal tax bracket. Taxpayers are not allowed to deduct contributions to a Roth IRA, but the funds in the account are allowed to grow tax-free, and qualified distributions taken from the account after the account holder reaches retirement age are free from federal income taxes.
  
  

Early Withdrawals

• All withdrawals made from a traditional IRA are considered by the Internal Revenue Service to be an early withdrawal if they are made prior to the account holder reaching 59 1/2 years of age. Earnings on contributions to a Roth IRA that are withdrawn prior to the account holder reaching 59 1/2 years of age are considered to be an early withdrawal. Amounts contributed into a Roth IRA may be withdrawn at any time without incurring a tax penalty since these funds have already been taxed.
  
  

Tax Penalties

• Early withdrawals from either a traditional IRA or a Roth IRA are usually considered to be non-qualified. Non-qualified withdrawals are subject to both ordinary taxation at the account holder's then current marginal tax rate plus a 10 percent tax penalty on the amount withdrawn. The 10 percent early withdrawal tax penalty cannot be considered as an early withdrawal from savings penalty and may not be included in the taxpayer's itemized deductions.
  
  

Considerations

• Not all early withdrawals from individual retirement accounts are considered to be non-qualified. An account holder may take penalty-free withdrawals from her IRA if she becomes disabled. The account holder's heirs may take penalty-free withdrawals from the IRA in the event of the account holder's death. Qualified early withdrawals may be made to pay for medical expenses not reimbursed that exceed 7.5 percent of the account holder's adjusted gross income. An account holder may uses funds from her IRA to pay for higher education expenses for herself, her spouse or her dependent children.