10 Reasons Why People Cash Out IRAs Early


Why would you cash out your retirement nest egg? We've got 10 reasons -- some better than others. See other money pictures. Lite Productions/Thinkstock

If you want to see your accountant fall off his chair, tell him you want to withdraw money early from your individual retirement account (IRA). The two most common types of IRAs are traditional IRAs and Roth IRAs. In both cases, the Internal Revenue Service (IRS) might charge income tax on IRA withdrawals — plus an additional 10 percent penalty — if you are younger than 59 ½ years old [source: IRS].

But what if you need the cash that you've stashed away for retirement right now? The good news is that the IRS authorizes exceptions to its IRA early withdrawal rules for medical expenses, education costs, first home purchases, disability and more.

Before we look at the reasons people cash out of their IRAs early, let's explain the basic difference between a traditional and a Roth IRA. It has to with when you are taxed.With a traditional IRA, your contributions to the account are not taxed. But any money you withdraw after age 59 ½ is taxed as income. A Roth IRA is the exact opposite. You pay income tax on contributions, but you can withdraw money tax-free.

We'll talk more about the different early withdrawal rules for traditional and Roth IRAs later, but for now, let's look at some of the top reasons — both rational and irrational — people have for cashing in their IRAs early.