Las Vegas Trusts and Estates

What Is the Worst Way to Withdraw from Retirement Account?

“Withdrawing from your retirement accounts in the wrong order could cost hundreds of thousands of dollars in retirement income.”

Smart Asset’s article entitled “The Worst Way to Withdraw From Your Retirement Accounts” reminds us that investing comes with risk, and no situation is the same. Let’s look at the impact of withdrawing from your retirement accounts in the wrong order.

1. Not Beginning with Your Investment Income. Withdrawing from your investments first gives your retirement accounts more time to accrue interest. If you start with your 401(k) or IRA, you could forfeit several years worth of income in retirement savings. Whether you have mutual funds, a brokerage account, ETFs, stocks or bonds, they are taxable. Therefore, you will have to pay capital gains taxes on withdrawals. Some investments also require you to pay taxes on distributions each year, like some mutual funds.
2. Claiming Social Security Benefits at 62. If you want your maximum Social Security benefits, you will need to keep working until your “full retirement” age. Benefits at age 62, 66, or 67 are not your maximum benefits. The maximum starts at age 70. If you claim before, you are not getting your full benefits. Every year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, wait until you are 70 when your payments will be the highest. They increase by 8% each year you wait. This strategy will help you collect the highest Social Security benefit, but everyone’s circumstances are not identical.
3. Withdrawing from Your 401(k) and IRA Before RMDs Start. You can begin to take cash from your 401(k), when you turn 59½. However, that does not mean it is a good idea. The law does not make you start taking Required Minimum Distributions until you turn 72. You can use this time for your money to keep growing with compound interest.
4. Using Your Roth IRA Funds Prior to Exhausting Other Options. Delay withdrawing money from your Roth IRA as long as you can because you paid taxes up front. Therefore, you can take money out of your Roth IRA and it will not count as taxable income. Your Roth IRA also will keep growing tax-free while you use your other savings. This is because a Roth IRA holds after-tax funds and the IRS does not need to tax it again, you also do not need to take Required Minimum Distributions. This account can keep growing for as long as you want.
5. The Smartest Way to Plan Your Withdrawals. Determining the best sequence to withdraw money from your retirement accounts is different for everyone, so speak with an experienced financial advisor who specializes in working with retirees and pre-retirees.

Reference: Smart Asset (July 20, 2021) “The Worst Way to Withdraw From Your Retirement Accounts”

Which Is Better a Traditional IRA or a Roth?

“Traditional IRAs have been available to retirement savers who have earned income since 1974. That’s 23 years longer than Roth IRAs (introduced in 1997) have been on the scene. The big difference between these two types of individual retirement savings vehicles is when you pay federal (and possibly state) income tax on your savings.”

FedWeek’s recent article entitled “Does a Roth IRA, or Roth Conversion Make Sense for You?” explains that with a traditional IRA, if your income is below certain levels, you make pre-tax contributions to your IRA (that you may be able to deduct) and pay your taxes when you withdraw that money after retirement, when you may be in a lower tax bracket. You’re paying those taxes on both your contributions and the earnings on those contributions. In contrast, with a Roth IRA, you contribute already taxed money to the IRA and, if your withdrawals are qualified, you pay no taxes at the time of withdrawal.

If you started your retirement savings before the introduction of the Roth or if you have had incomes too high to allow you to contribute to a Roth, you may want to move more of your retirement savings from traditional IRAs (where you pay taxes at withdrawal) to Roth IRAs (where you pay taxes up front, but benefit from tax free growth).

A Roth IRA conversion allows you to move monies from your traditional IRA into a new or existing Roth IRA. There are no income limits or limits on the amount that can be converted, but you must pay tax on all untaxed monies that you convert. Therefore, if you converted money from a traditional IRA where you were able to deduct your contributions, you’d pay tax on every dollar you converted. And if you converted money from a traditional IRA where you were not able to deduct your contributions, you’d pay tax on the amount of the conversion that was attributable to earnings. These taxes would be at your rate for ordinary income. Think about these items, before you decide to convert money from a traditional IRA to a Roth IRA:

When will you need the money? If you have an immediate need for the funds or need them to support your current standard of living, then a Roth conversion is probably not a good idea. But if you have no immediate need for the funds, a Roth conversion can be a terrific way for your money to grow tax-free over your lifetime.

Where will the money come from to pay the tax? Typically, the money to pay the tax on the Roth conversion should come from outside funds and not from a retirement account, if the conversion is to make sense. When a conversion is made, it almost always triggers a taxable event. As a result, your ability to pay that tax with outside money will go a long way in determining if a Roth conversion is right for you.

What do you think future tax rates will be? If you think that your income tax rate will be the same or higher in retirement, then converting funds to a Roth is wise. That’s because you’ll be paying your taxes at a lower rate. But if you believe your income tax rate will be lower in retirement, conversion may not be right for you.

Reference: FedWeek (March 30, 2021) “Does a Roth IRA, or Roth Conversion Make Sense for You?”

Are Roth IRAs Smart for Estate Planning?

“Here are some of the reasons Roth IRAs make sense for 2021 and likely beyond.”

Think Advisor’s recent article entitled “Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool” says that Roth IRAs offer an great planning tool, and that the Secure Act 2.0 retirement bill (which is expected to pass) will create an even wider window for Roth IRA planning.

With President Biden’s proposed tax increases, it is wise to leverage Roth conversions and other strategies while tax rates are historically low—and the original Secure Act of 2019 made Roth IRAs particularly valuable for estate planning.

Roth Conversions and Low Tax Rates. Though tax rates for some individuals may increase under the Biden tax proposals, rates for 2021 are currently at historically low levels under the Tax Cuts and Jobs Act passed at the end of 2017. This makes Roth IRA conversions attractive. You will pay less in taxes on the conversion of the same amount than you would have prior to the 2017 tax overhaul. It can be smart to make a conversion in an amount that will let you “fill up” your current federal tax bracket.

Reduce Future RMDs. The money in a Roth IRA is not subject to RMDs. Money contributed to a Roth IRA directly and money contributed to a Roth 401(k) and later rolled over to a Roth IRA can be allowed to grow beyond age 72 (when RMDs are currently required to start). For those who do not need the money and who prefer not to pay the taxes on RMDs, Roth IRAs have this flexibility. No RMD requirement also lets the Roth account to continue to grow tax-free, so this money can be passed on to a spouse or other beneficiaries at your death.

The Securing a Strong Retirement Act, known as the Secure Act 2.0, would gradually raise the age for RMDs to start to 75 by 2032. The first step would be effective January 1, 2022, moving the starting age to 73. If passed, this provision would provide extra time for Roth conversions and Roth contributions to help retirees permanently avoid RMDs.

Tax Diversification. Roth IRAs provide tax diversification. For those with a significant amount of their retirement assets in traditional IRA and 401(k) accounts, this can be an important planning tool as you approach retirement. The ability to withdraw funds on a tax-free basis from your Roth IRA can help provide tax planning options in the face of an uncertain future regarding tax rates.

Estate Planning and the Secure Act. Roth IRAs have long been a super estate planning vehicle because there is no RMD requirement. This lets the Roth assets continue to grow tax-free for the account holder’s beneficiaries. Moreover, this tax-free status has taken on another dimension with the inherited IRA rules under the Setting Every Community Up for Retirement Enhancement (Secure) Act. The legislation eliminates the stretch IRA for inherited IRAs for most non-spousal beneficiaries. As a result, these beneficiaries have to withdraw the entire amount in an inherited IRA within 10 years of inheriting the account. Inherited Roth IRAs are also subject to the 10-year rule, but the withdrawals can be made tax-free by account beneficiaries, if the original account owner had met the 5-year rule prior to his or her death. This makes a Roth IRA an ideal estate planning tool in situations where your beneficiaries are non-spouses who do not qualify as eligible designated beneficiaries.

Reference: Think Advisor (May 11, 2021) “Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool”

Should a Trust Be a Component of My Estate Planning?

“Do I need a trust in case something happens to me?”

Let’s say that there’s a young father with a wife and young son, who owns a home and a Roth IRA account, with a few stock investments. On the stock investments, he’s filled out the beneficiary designation forms passing all his assets to his wife and son, should anything happen to him.

This father owns his home is joint tenancy with right of survivorship with his wife.

Does he need to set up a separate trust, if most of his assets pass through beneficiary designations?

Nj.com’s recent article entitled “Do I need a trust in case something happens to me?” says that leaving assets outright to a minor is typically a bad move. The son’s guardian and/or the court would take custody of the assets, both of which require significant court oversight and involvement.

The minor would also receive the assets upon attaining the age of majority, which in most states is age 18.

No one can tell what a young child will be like at the age of 18, especially after suffering the loss of their parents. Even if there are no significant issues, such as drug addiction or special needs, parents should think about what they’d have done with that much money at that age.

The best option is to leave assets in trust for the benefit of the minor son.

The trustee can manage and use the assets for the benefit of the young boy with limited court involvement.

The terms of the trust can also delay the point at which the assets can be distributed and ultimately paid over to the beneficiary, if at all.

For example, it’s not uncommon for a trust to stipulate that the beneficiary gets a third of the assets at 25, half of the remaining assets at 30 and the rest at age 35. However, other trusts don’t provide for such mandatory distributions and can hold the assets for the beneficiary’s lifetime, which has its advantages.

In some instances, the terms of the trust are included in a will. This creates a trust account after death, which is also called a testamentary trust.

Talk to an experienced estate planning attorney, who can assess your specific situation and provide guidance in creating an estate plan. The attorney can also make certain that trust assets are correctly titled and that beneficiary designations of retirement accounts and life insurance are correctly prepared, so the trust under the will receives those assets and not the minor individually.

Reference: nj.com (June 14, 2021) “Do I need a trust in case something happens to me?”

What Retirement Questions Should I Be Asking at 60?

“Retirement is an exciting milestone. Planning becomes even more crucial, once you get within a few years of saying goodbye to your career. As we turn 60 and inch closer to retirement, there are important questions to answer.”

The average American plans to retire in their late 60s. If you are within five to 10 years of your target retirement age, it’s important you take planning seriously, says Kiplinger’s recent article entitled “Turning 60? Ask Yourself These 4 Important Questions.”

There are some big questions to ask yourself, as you enter this major decade of life. Answering honestly will help you avoid costly mistakes and allow you to make any necessary changes to your retirement plan, while you’re still earning an income.

Do I Have Enough Dough Saved? One of the biggest fears of those nearing retirement is outliving their savings. A general rule of thumb is to have eight times your annual income saved by age 60, but this may change based on your situation. Consider your lifestyle expectations in retirement, when calculating what you need to save. You should also consider exactly when you want to retire and how long you expect to live in retirement. Look at your current health and family history, when mapping out your life expectancy. It’s essential to budget for different scenarios, including unexpected health care expenses, to calculate whether you have enough saved or if you need to play catch-up.

Will My Income Fluctuate? Probably, so you’ll need to be ready. To tell how much of your income might be subject to fluctuations, look at your income sources in retirement. These include 401(k)s, traditional and Roth IRAs, annuities, and any savings or investment accounts. The net step is to calculate what percentage of your retirement income will stay steady as you grow older, like pensions or Social Security. Compare that to the income that may ebb and flow as you take money out of different retirement accounts.

When Should I Claim Social Security? You can collect Social Security at 62, but for many, it might be worth delaying until full retirement age, which is age 67 for those born in 1960 or later. If you go ahead and claim Social Security before your full retirement age, your benefit will most likely be permanently reduced by as much as 30%. If you can hold out until age 70, you’ll get 100% of your benefit plus an additional 32%.

Is My Family Protected? The financial strain of caring for a loved one is tremendous. Family caregivers spend about 20% of their income on caregiving expenses. Long-term care insurance helps cover the costs of nursing home care and home health care, and it can also help families pay for chronic medical conditions, like Alzheimer’s or dementia. If you’re eligible and in good health, the best time to look at long-term care options is between the ages of 60 and 65. You should also review your estate plan as you enter your 60s. If you haven’t created an estate plan yet, meet with an estate planning attorney to get your documents drafted. If you have a plan, be sure your family knows who your attorney is and that they have copies of the legal documents they need. Review your will or trust to make sure your beneficiaries are current.

These questions will help you develop a retirement budget and income plan and will make certain your family is taken care of.

Reference: Kiplinger (April 2, 2021) “Turning 60? Ask Yourself These 4 Important Questions”

Should I Name a Living Trust Beneficiary of a Roth IRA?

“Can a living trust be the beneficiary of a Roth IRA?”

The simple answer is yes, a living trust can be the beneficiary of a Roth IRA. However, without knowing more about an individual’s specific circumstances, it’s hard to know if this is a wise move.

A November 2018 article from NJ Money Help entitled, “Be careful when choosing a beneficiary,” explains that there are several things you need to know when considering a living trust as the beneficiary of a Roth IRA.

By designating a living trust as your beneficiary, the distributions from the Roth at your death will become mandatory based on the life expectancy of the oldest beneficiary named in the trust.

This is an important point if you’re currently married. That’s because you’ll forfeit the ability for a spousal rollover, by naming the trust as your beneficiary.

Current law permits IRAs to be passed to a spouse as a beneficiary, and the spousal beneficiary can treat the account as if it was their own IRA.

In the case of a Roth IRA, this means the surviving spouse can continue to defer distributions tax-free for their lifetime.

By naming the living trust as beneficiary, this benefit is lost no matter if your spouse is one of the living trust beneficiaries.

Why?

Distributions are required to begin immediately, if the beneficiary is anyone other than a spouse.

Thus, you would forgo the ability to allow the funds to continue to grow tax-free for a longer period of time.

You should talk about this with an experienced estate planning attorney. He or she will be able to look at your entire financial situation before you determine if this is a wise move for you.

Reference: NJ Money Help (Nov. 2018) “Be careful when choosing a beneficiary”

Why Do I Need Estate Planning?

“Over the years, several high-profile celebrities have died without either properly updating their estate plan or having one at all. The list includes Princess Diana, Prince, Heath Ledger, Michael Jackson and Kurt Cobain, all of whom were worth millions and among the most famous people on the planet at the time of their death.”

Many people who failed to plan their estate with the help of an experienced estate planning attorney have their assets tied up in lengthy, and often messy, legal battles that were decided by people not of their choosing.

Forbes’ recent article entitled “Everyone Needs An Estate Plan: Here's What You Need To Know” says that although many of us don't have quite as much at stake financially, it doesn't mean that estate planning is any less important. In fact, leaving a legacy, passing down wealth and helping family aren’t things that are just for the ultra-rich.

The biggest misstep is not creating an estate plan at all. This is more than just a last will and includes powers of attorney, healthcare directives, a living will and a HIPAA waiver. People put this important responsibility off because they do not want to contemplate their own death. They try to avoid the subject. Some others may have complex family dynamics, and still others are hesitant to confide their complicated relationships with a lawyer. However, all these are just excuses.

We know that life is full of changes, and people get married, divorced, have children and grandchildren, relocate to different states, change careers and get inheritances. Each of these events could make you reconsider your goals. This may necessitate an update to your estate plan.

You need to review the beneficiaries on your IRAs, life insurance policies and pensions. You should look at how you want your heirs to receive your assets and any charitable or philanthropic notions. With powers of attorney, healthcare directives, living wills and HIPAA waivers, you need to think about who you’ll entrust to make important medical and financial decisions for you, if you become incapacitated. You see these critical questions and many others are fluid and prone to change every few years as your life changes.

Remember that your assets receive different treatment from the IRS based on the type and who owns legally owns them. For example, individual retirement accounts (IRAs), Roth IRAs, traditional brokerage accounts, life insurance policies and bank accounts are different than the family home. Therefore, it’s important to be mindful of which assets are left to whom.

Don’t wait. Speak to an experienced estate planning attorney to be certain that you give this process the attention it deserves for the well-being of you and your family.

Reference: Forbes (Feb. 26, 2021) “Everyone Needs An Estate Plan: Here's What You Need To Know”

What Do I Need to Do to Calculate and Correct an Excess IRA Contribution?

“IRAs are a great way to save for retirement, but what happens if you contribute to a Roth IRA and your income is too high? Or you contribute more than you're allowed to a Roth or traditional IRA?”

It would be super if you could put all your money into a Roth and enjoy tax-free growth and withdrawals. However, Uncle Sam restricts the amount you can contribute annually, and eligibility is based on your income. However, if you make too much money, you might be able to use a work-around called a backdoor Roth.

Investopedia’s January article entitled “How to Calculate (and Fix) Excess IRA Contributions” says there’s also a contribution limit for traditional IRAs. However, these income limits concern deducting contributions on your taxes. If you violate a rule and make an ineligible, or excess, contribution, you’re looking at a 6% penalty on the amount each year, until you correct the mistake. However, note that Roth IRAs have an extra restriction: whether you can contribute up to the limit—or anything at all—depends on your modified adjusted gross income (MAGI). If you contributed to a Roth when you made too much to qualify—or if you contributed more than you’re allowed to either IRA—you’ve made an excess contribution, which is subject to a 6% tax penalty.

The $6,000 (or $7,000) maximum is the combined total that you’re allowed to contribute to all your IRAs. Therefore, if you have a traditional IRA and a Roth IRA, your total contribution to those two accounts must be $6,000 (or $7,000). The amount you contribute can't be more than your earned income for the year. If your earned income is $4,000, that’s the maximum you can contribute to an IRA.

The penalty of 6% of the excess amount must be paid when you file your income tax return. If you fail to fix the mistake, you’ll owe the penalty each year the excess remains in your account. If you’re not eligible to take a qualified distribution from your IRA to fix the mistake, you’ll pay an additional 10% early withdrawal penalty on earnings (interest). The IRS has a specific formula to calculate earnings (or losses) attributable to an excess contribution. There are several ways to fix an excess contribution to an IRA:

Withdraw the excess contribution and earnings. You can avoid the 6% penalty, if you withdraw the extra contribution and any earnings before your tax deadline. You are required to declare the earnings as income on your taxes. You may also owe a 10% tax for early withdrawal on the earnings, if you're younger than 59½.

File an amended tax return (if you’ve already filed). If you remove the excess contribution and earnings and file an amended return by the October extension deadline, you can also avoid the 6% penalty.

Apply the excess to next year’s contribution. You’ll still owe the 6% tax this year, but you’ll at least stop paying once you apply the excess.

Withdraw the excess next year. If you don't do one of the other options, you can withdraw the excess funds by Dec. 31 of the next year. You can leave the earnings, but you must remove the entire excess contribution to avoid that 6% penalty for the following year.

In addition to the formula, you must correct the excess from the same IRA. Therefore, if you have multiple IRAs, you can't choose the IRA you want to "fix." The last contribution is also an excess contribution. If you made multiple contributions to an IRA, the last is considered the excess contribution. Finally, you are able to distribute the entire balance to correct the excess. If the excess amount is the only contribution you made to the IRA—and no other contributions, distributions, transfers, or recharacterizations occurred in the IRA—you can fix the excess, by simply distributing the entire IRA balance by the applicable deadline.

Most people who make ineligible contributions to an IRA do so by accident, and you could contribute too much if you meet the following criteria:

• You make more money, and it moves you up to an income eligibility range
• You overlook a contribution you made earlier in the year; or
• You contributed more than your earned income for the year.

In a good faith attempt to fund your retirement accounts, you could make an excess contribution. The IRS has considered that this may occur. The agency provides guidelines to help you correct the error.

Reference: Investopedia (Jan.  19, 2020) “How to Calculate (and Fix) Excess IRA Contributions”

What Do I Need to Retire?

“One of the biggest threats to your financial security isn’t the markets, interest rates or even your job security. It is a lack of preparation, particularly for unexpected events, that usually leaves investors reeling when markets swoon. If you haven’t protected yourself from the potential downsides in life, after all, then it’s difficult to maneuver when the unforeseen strikes.”

Research from the Employee Benefit Research Institute’s Retirement Confidence Survey shows a lack of preparation in retirement planning. According to the annual survey, 66% of those 55 years and older said they were confident they had sufficient savings to live comfortably throughout retirement. However, just 48% within the same age group haven’t figured out their retirement needs.

Kiplinger’s article entitled “Ready to Retire? Not Until You've Done These 3 Things” says knowing where you are now and knowing what you’ll need and want in retirement are important to protect your portfolio throughout your golden years. If you want to retire at 65, then age 55 is when you’ll want to start making some important decisions.

Let’s look at three steps to take in your last decade of your working years to help create a safety net for a long retirement:

At 10 years or more before retirement, you should diversify your tax exposure. You may have a large portion of your portfolio in an employer sponsored 401(k) or in IRAs. These tax-deferred accounts give you plenty of benefits now, because you’re not taxed on the contributions. At age 50 and older, you can make additional catch-up contributions that let you put away $26,000 in 2020 in your 401(k) each year. Because you’re probably going to pay a lower tax rate in retirement when you begin taking taxable withdrawals, it gives you a nice tax advantage today.

In the years before your retirement, build assets in tax-free accounts for flexibility, so you can keep tax costs down in retirement. Assets in a Roth IRA or a Roth account within your 401(k) can give you a source of tax-free income in retirement. You paid taxes on the money you put into a Roth, so it grows tax-free and withdrawals after age 59½ are income tax free. If you’re over 50, then you can add up to $7,000 into the account this year.

When you are five years from retirement, create a health care plan. A huge expense in retirement is health care. Plan for out-of-pocket health care costs as well as long-term care. Taking advantage of a health savings account, if you’re in a high-deductible health insurance plan is a good way to save for the out-of-pocket health care expenses that won’t be covered by Medicare or your private health insurance. You can fund an HSA up to $7,100 for families ($8,100 if you’re 55 or older). Contributions are made on a pre-tax basis, so your account grows tax free, and withdrawals are tax- and penalty-free, if used for qualified health care expenses. You should also look at long-term care insurance.

When you’re just a year from retirement, start spending as if you’re already retired. Be sure you can live comfortably, when spending at your retirement budget.

No one can see the future, but you may be able to limit the effects of shocks to your retirement savings.  Adding in these layers of protection at least 10 years prior to retirement, can help you secure your retirement goals.

Reference: Kiplinger (Jan. 24, 2020) “Ready to Retire? Not Until You've Done These 3 Things”

You Could Be Hit with Penalty for an Early IRA Withdrawal

“Most financial experts would agree that it is rarely, if ever, a good idea to take an early withdrawal from a traditional IRA or Roth IRA. This is due in part to the high cost of penalties that can hit an account holder for an early withdrawal (not to mention losing out on years of potential earnings).”

Early distributions from IRAs—before you reach 59½—typically are hit with a 10% tax penalty, and you may owe income tax on it. The IRS uses the penalty to discourage IRA account holders from dipping into their savings before retirement. However, the penalty only applies if you withdraw taxable funds, says Investopedia, in its new article entitled “Early Withdrawal Penalties for Traditional and Roth IRAs.”

If you withdraw funds that aren’t subject to income tax, there’s no penalty for distributions taken at any time. The issue of whether the funds are taxable depends on the type of IRA. Early distributions from traditional IRAs are the most likely to incur significant penalties. That’s because you make contributions to this type of account with pretax dollars. These are subtracted from your taxable income for the year, which will decrease the amount of income tax you'll owe. As a result, since you get an upfront tax break when you contribute to a traditional IRA, you have to pay taxes on your withdrawals in retirement.

Nonetheless, the IRS eventually collects taxes on all income. Income tax is assessed on your traditional IRA funds when you withdraw them, which means that all of your traditional IRA account balance is made up of taxable income. Therefore, if you withdraw funds before 59½, the 10% tax penalty probably will apply to the full amount of the distribution. After calculating the effect of the taxes and penalties, early distribution from a traditional IRA is almost never an efficient use of funds.

However, contributions to Roth IRAs are made with after-tax dollars, so you pay income tax on your contributions when you make them. Therefore, withdrawals of Roth contributions aren’t subject to income tax. Your earnings grow tax-free and withdrawals in retirement are also tax-free. If you withdraw an amount equivalent to the sum you put into your Roth, the distribution isn’t considered taxable income, regardless of your age. It is also not subject to a penalty. However, if you withdraw more than that amount and begin dipping into the account's earnings, that amount is usually considered taxable income. It may also be subject to the 10% early-distribution penalty, and the money would be treated as income.

Qualified distributions from a Roth IRA are tax-free and penalty-free. The IRS says a distribution is qualified, if it's been at least five years since you first contributed to a Roth IRA and the withdrawal satisfies these requirements:

• It was made after age 59½;
• It was taken because you have a permanent disability;
• It was made by your beneficiary or estate after you die;
• It was used to buy, build, or rebuild a home that satisfies the first-time homebuyer exception; or
• It was used towards the birth of a new child or adoption (up to $5,000 within the first year).

Non-qualified distributions are any withdrawals that don't meet these guidelines. For these, you'll owe taxes at your ordinary income tax rate (on earnings) and a 10% penalty. However, there are some exceptions. You do pay a penalty (but still must pay the tax), if you take the distribution for the following reasons:

• A series of substantially equal distributions;
• Unreimbursed medical expenses that exceed 10% of your adjusted gross income (AGI);
• Medical insurance premiums after job loss;
• IRS levy;
• Qualified reservist distributions;
• Qualified disaster recovery; or
• Qualified education expenses.

Note that if you contribute and then withdraw within the same tax year, the contribution is treated as if it were never made.

If you have a Roth IRA, you can withdraw contributions at any time without paying taxes and penalties. However, if you remove money early from either a traditional or Roth IRA, you will pay a 10% penalty plus taxes on the income (unless you qualify for an exception).

Reference: Investopedia (Jan. 18, 2020) “Early Withdrawal Penalties for Traditional and Roth IRAs”