When you have an IRA (Individual Retirement Arrangement) and you take money out before you turn age 59 1/2 you may pay a 10% penalty – IRA Early Distribution Penalty. There are exceptions to that rule.
My Mentor
One of my Mentors, Ed Slott, is highly skilled in what qualifies and what does not, as am I.
A case I am working on
I recently had someone in the office who had taken an early distribution. The person thought they could simply move money from one retirement account to the next. However it was a bad plan. In 2014 it was determined that you can’t move money from one account to the next to create a shell game. There is a once per year rule for all accounts.
The next issue turned out to be that the person had “converted” to a Roth IRA. However, back in 2008 when this was done the money was placed into a rollover IRA. OOPS! There is nothing to do to undo the damage. Sixty-five thousand dollars were paid in taxes, which can’t be recovered. It is likely there is even a 10% penalty due as the taxes were paid from the distribution. Worse yet, this person now has after-tax money in their IRA. Forever subject to pro-rata distributions from the IRA.
IRA Early Distribution Penalty
Here is some more details on this subject from Ed Slott