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.
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