What happens if an individual withdraws money early from a traditional IRA?

When an individual withdraws money early from a traditional IRA, they may incur penalties in addition to taxes due on the withdrawn amount. The Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty for distributions taken before the age of 59½, unless certain exceptions apply, such as a first-time home purchase, qualified education expenses, or certain medical expenses.

Additionally, any money withdrawn is considered taxable income in the year of the withdrawal, as traditional IRA contributions are typically made with pre-tax dollars. This means the individual will not only face the penalty but also owe income tax on the amount withdrawn, further increasing the financial impact of an early withdrawal.

Understanding these implications is crucial for effective financial planning, as early withdrawals can significantly reduce retirement savings and lead to unexpected tax liabilities.