Small withdrawals from IRA
Yes, it really will hurt you to keep pulling your money from your IRA. Your best bet is to set up a payment plan with the IRS, and pay the taxes you owe now, as well as adjust your withholding (with a new W-4 to your payroll department) so that you don't have a large tax liability next year. These tax advantaged plans really are designed to penalize you if you pull the money out early to give you incentive to keep the money for retirement. Your best bet is to make a monthly budget that includes your tax payments for taxes owed this year, as well as higher deductions from your paycheck to properly withhold taxes for next year. "First - Welcome to Money.SE. You gave a lot of detail, and it's tough to parse out the single question. Actually, you have multiple issues. $1300 is what you need to pay the tax? In the 25% bracket plus 10% penalty, you have a 65% net amount. $1300/.65 = Exactly $2000. You withdraw $2000, have them (the IRA holder) withhold $700 in federal tax, and you're done.  All that said, don't do it. Nathan's answer - payment plan with IRS - is the way to go.  You've shared with us a important issue. Your budget is running too tight. We have a post here, ""the correct order of investing"" which provides a great guideline that applies to most visitors. You are missing the part that requires a decent sized emergency fund. In your case, calling it that, may be a misnomer, as the tax bill isn't an unexpected emergency, but something that should have been foreseeable. We have had a number of posts here that advocate the paid in full house. And I always respond that the emergency fund comes first. With $70K of income, you should have $35K or so of liquidity, money readily available. Tax due in April shouldn't be causing you this grief. Please read that post I linked and others here to help you with the budgeting issue.  Last - You are in an enviable position, A half million dollars, no mortgage, mid 40s. Easily doing better than most. So, please forgive the soapbox tone of the above, it was just my ""see, that's what I'm talking about"" moment from my tenure here." "You have several questions in your post so I'll deal with them individually: Is taking small sums from your IRA really that detrimental? I mean as far as tax is concerned? Percentage wise, you pay the tax on the amount plus a 10% penalty, plus the opportunity cost of the gains that the money would have gotten.  At 6% growth annually, in 5 years that's more than a 34% loss.  There are much cheaper ways to get funds than tapping your IRA. Isn't the 10% ""penalty"" really to cover SS and the medicare tax that you did not pay before putting money into your retirement? No - you still pay SS and medicare on your gross income - 401(k) contributions just reduce how much you pay in income tax.  The 10% penalty is to dissuade you from using retirement money before you retire. If I ... contributed that to my IRA before taxes (including SS and medicare tax) that money would gain 6% interest. Again, you would still pay SS and Medicare, and like you say there's no guarantee that you'll earn 6% on your money.  I don't think you can pay taxes up front when making an early withdrawal from an IRA can you?  This one you got right.  When you file your taxes, your IRA contributions for the year are totaled up and are deducted from your gross income for tax purposes. There's no tax effect when you make the contribution. Would it not be better to contribute that $5500 to my IRA and if I didn't need it, great, let it grow but if I did need it toward the end of the year, do an early withdrawal? So what do you plan your tax withholdings against?  Do you plan on keeping it there (reducing your withholdings) and pay a big tax bill (plus possibly penalties) if you ""need it""?  Or do you plan to take it out and have a big refund when you file your taxes? You might be better off saving that up in a savings account during the year, and if at the end of the year you didn't use it, then make an IRA contribution, which will lower the taxes you pay.  Don't use your IRA as a ""hopeful"" savings account. So if I needed to withdrawal $5500 and I am in the 25% tax bracket, I would owe the government $1925 in taxes+ 10% penalty. So if I withdrew $7425 to cover the tax and penalty, I would then be taxed $2600 (an additional $675). Sounds like a cat chasing it's tail trying to cover the tax. Yes if you take a withdrawal to pay the taxes. If you pay the tax with non-retirement money then the cycle stops. how can I make a withdrawal from an IRA without having to pay tax on tax. Pay cash for the tax and penalty rather then taking another withdrawal to pay the tax.  If you can't afford the tax and penalty in cash, then don't withdraw at all. based on this year's W-2 form, I had an accountant do my taxes and the $27K loan was added as earned income then in another block there was the $2700 amount for the penalty. So you paid 25% in income tax for the earned income and an additional 10% penalty.  So in your case it was a 35% overall ""tax"" instead of the 40% rule of thumb (since many people are in 28% and 35% tax brackets) The bottom line is it sounds like you are completely unorganized and have absolutely no margin to cover any unexpected expenses.  I would stop contributing to retirement today until you can get control of your spending, get on a budget, and stop trying to use your IRA as a piggy bank.  If you don't plan on using the money for retirement then don't put it in an IRA.  Stop borrowing from it and getting into further binds that force you to make bad financial decisions. You don't go into detail about any other aspects (mortgage? car loans? consumer debt?) to even begin to know where the real problem is.  So you need to write everything down that you own and you owe, write out your monthly expenses and income, and figure out what you can cut if needed in order to build up some cash savings. Until then, you're driving across country in a car with no tires, worrying about which highway will give you the best gas mileage."
I'd say yes, and hope that my anecdotal evidence serves as proof. My IRA is not a margin account. It can't be.  I attempt to create a covered call, buying a stock at say $20, and selling a call for $4, for net $16 cost. The account only had $1610 at the time, and the trades go through just fine. Yes, I needed to enter as a limit order, at the same time, a single order with the $16 debit limit.  If this is not enough proof, I'd be curious - why not? The option proceeds must clear, of course, which it does. Yes, it's possible to withdraw money without penalty but you have to do it in a special way. For example you have to withdraw the same amount every year until you retire: Tapping Your IRA Penalty-Free  as for unstable economy - you can trade many instruments in your IRA. you can do bonds, mutual funds, stocks, ETFs or just keep it in cash. Some do well in bad economy. Those aren't distributions, they're contributions.  Distribution is when the money comes out of the retirement accounts. Here is the best source (the IRS) for information about tax advantaged retirement plans. According to Publication 590, broker's commissions for stock transactions within an IRA cannot be paid in addition to the IRA contribution(s), but they are deductible as part of the contribution, or add to the basis if you are making a nondeductible contribution to a Traditional IRA. (Top of Page 10, and Page 12, column 1, in the 2012 edition of Pub 590). On the other hand, trustees'  administrative fees can be paid from outside the IRA if they are billed separately, and are even deductible as a Miscellaneous Deduction on Schedule A of your income tax return (subject to the 2% of AGI threshold).  A long time ago, when my IRA account balances were much smaller, I used to get a bill from my IRA custodian for a $20 annual administrative fee which I paid separately (but never got to deduct due to the 2% threshold). My custodian also allowed  the option of doing nothing in which case the $20 would be collected from (and thus reduce) the amount of money in my IRA.  Note that this does not apply to the expenses charged by the mutual funds that you might have in your IRA; these expenses are treated the same as brokerage commissions and must be paid from within the IRA. First of all depending on the type of IRA you may not have to pay taxes on withdrawals in the US at all. If you are withdrawing your principle from a Roth IRA then you don't owe taxes. Only when you withdraw the gains do you pay taxes on it. You have two options for withdrawals: Lump Sum Withdrawal: If you take a lump sum withdrawal you will owe taxes to the US (30% for non-resident aliens of the US), and according to DTAA; Article 23, you will file your taxes with India declaring your IRA or 401(k) withdrawal proceeds and claim credit on the taxes you paid to the US.  Monthly Pension Withdrawal: You can also receive monthly pension payments and you will only be taxed in the country in which you are a resident of. This is according to DTAA, Article 20. You would then have to submit necessary documentation to your payer in the US so that they do not withhold any taxes in the US. Just as a side note it might be just better to keep the money where it is and let it grow or roll it over to a Roth IRA if you are currently in a lower tax bracket for maximum savings of your principle. Here is a link with more detailed information of what I provided you: http://articles.economictimes.indiatimes.com/2012-01-25/news/30663129_1_taxable-income-nri-401k-plan Nice idea. When I started my IRAs, I considered this as well, and the answer from the broker was that this was not permitted. And, aside from transfers from other IRAs or retirement accounts, you can't 'deposit' shares to the IRA, only cash. The bucket concept. What ever works. Some people literally use envelopes, putting cash into each category for there upcoming bills. I prefer not to mix my long term investments. My daughter's college fund is in a series of separate accounts from our retirement money. I won't criticize your CFP's comments, because advice is individual, her approach probably works well for her clients. The important thing isn't the focus on the words, but the end result. Spend less than you earn, save for each of your goals.  I removed any IRA/US reference and comment on bucket concept. I had a situation like this also. A client deposited an IRA check to his local P.O. prior to collection p/up, thinking this meant it would be postmarked April 15. It may have been picked up, but wasn't postmarked until the next day, and my firm refused to consider it as timely. I do remember discussing it w/my Retirement Services Dept. Maybe they made an exception for me and my client, but maybe not. I don't remember. Good luck. As far as I know, there is no direct equivalent. An IRA is subject to many rules.  Not only are there early withdrawal penalties, but the ability to deduct contributions to an IRA phases out with one's income level.  Qualified withdrawals from an IRA won't have penalties, but they will be taxed as income.  Contributions to a Roth IRA can be made post-tax and the resulting gains will be tax free, but they cannot be withdrawn early. Another tax-deductable investment is a 529 plan.  These can be withdrawn from at any time, but there is a penalty if the money is not used for educational purposes. A 401K or similar employer-sponsored fund is made with pre-tax dollars unless it is designated as a Roth 401K.  These plans also require money to be withdrawn specifically for retirement, with a 10% penalty for early withdrawal.  Qualifying withdrawals from a regular retirement plan are taxed as income, those from a Roth plan are not (as with an IRA). Money can be made harder to get at by investing in all of the types of funds you can invest in using an IRA through the same brokers under a different type of account, but the contribution will be made with post-tax, non-deductable dollars and the gains will be taxed. According to the link below, it does appear that you must take an RMD, or Required Minimum Distribution, from your IRA at age 70½, or face a 50% penalty of the RMD AMOUNT that has NOT been taken, which is going to be much less than 50% of your entire account balance.  Why specifically this happens would be opinion based on my interpretation of the reasoning behind those that enacted the law. I can tell you penalties like this are used to encourage behavior - you can't just leave your money in a tax-free account forever. The IRA is meant to help you build your savings for retirement, and at age 70½ you should be ready for retirement.  This means you must begin withdrawing the money - but that doesn't mean you have to spend it.  In the link below, there are outlines on what you can do to satisfy the required minimum distribution. As it specifies, you can take one lump sum, or spread it out over multiple payments, and there's a calculator to identify what your RMD will be. http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/withdrawals_and_distributions/age_70_and_a_half_and_over As noted in the linked page, you DO NOT have to take an RMD on a Roth IRA. If this is important to you, you may want to consider Rolling Over your current IRA to a Roth. Roth IRAs divide your withdrawal into 3 categories: Contributions, Conversions, and Earnings. This is significant, because each have different tax consequences and the order of withdrawal is dictated by tax law. You can withdraw your contributions in less than 5 years for any reason (home buyer or not). You cannot withdraw your conversions or earnings without waiting 5 years unless you pay the 10% penalty.  The home buyer exemption is only after the 5 years are met. Further detail found on the motley fool: home purchase exemption, distributions, early withdrawals. IRA is an account. You can open as many as you want. What's limited is the contributions: you cannot deposit to the IRA (all of them combined) more than what you've earned during the year, or $5500 (for 2013), the lowest. There are also limits on how much you can deduct, depending on your income and availability of other retirement programs at your work. You can open as many IRAs as you want in your child's name, but if your child had only earned $500 this year - that's how much you can put in these accounts. Your wife and you share the earned income limit, so if your wife is not working, you can still contribute to the IRA in her name, based on your own earnings (i.e.: if you earned more than $11000 - you can contribute the maximum $5500 for each of you). The limits are for all the IRA combined, doesn't matter how many accounts you have, and how many of them are Roth. No, you cannot. If you withdraw everything from all your Roth IRA's and end up with less than the total basis - you can deduct the difference on your schedule A (at the time of the last withdrawal) as an itemized deduction (as misc. deductions with 2% AGI cap). Regular IRA's are pre-tax, you cannot deduct anything from them. "Yes, it is possible to withdraw money from your Roth IRA before retirement (but I wouldn't necessarily advise you to do so.)  Here's the good news, and the bad news: The good news: Unlike a traditional IRA, money contributed to a Roth IRA is done so on an after-tax basis, meaning you don't benefit from a tax deduction on contributions. So, the money you withdraw from your Roth IRA will not be taxed entirely as ordinary income. In fact, you are allowed to withdraw the amount of your original contributions (also known as basis) without any taxes or penalties. Let's imagine you originally deposited $9000 of that current $10K total value – then in such a case, $9000 could be withdrawn tax and penalty free. The bad news: When it comes to the investment earnings – the other $1000 in my example –  it's a different story:  Since you wouldn't be age 59 1/2 at the time of withdrawal, any money taken out beyond your original contributions would be considered a non-qualified withdrawal and subject to both ordinary income taxes plus a 10% early withdrawal penalty.  Ouch! Perhaps you might want to restrict your withdrawal to your original contributions.  I would imagine if you've had the account for such a short period of time that much or all of your account value is original contributions anyway. A good article about the rules for early IRA withdrawals is About.com's Tax Penalty for Early Distribution of Retirement Funds. Note: If your Roth IRA funds were the result of a rollover from another account type, other rules may apply. See Roth IRA (Wikipedia) for more detail; search for ""rollover"". Regarding the withdrawal process itself and the timing, you should check with your account custodian on how to proceed." There's nothing much you can do here, and I don't think you'll succeed in placing blame on the lawyers. In order for SSA to have the tax withheld from your benefits, you need to submit form W-4V. Here are the details on how to get it and what to do with it. This form is voluntarily submitted, i.e.: no-one will ask for it, you have to actively send it out on your own. As to repayment of the LTD benefits - since they were not taxable, there's no change in the taxable income on your behalf. What you got wasn't taxed, so what you gave back - doesn't provide any tax benefit. As to why SSA benefits are taxable and LTD benefits are not - this is because SSA is pre-tax, and LTD premiums were (in your case, apparently) post-tax. However, the LTD benefits management company doesn't care or may be even know about this, and they do everything they can to reduce their own liability to you. If you're entitled to SSA benefits, it reduces their liability, that's why they insisted on your claim with SSA. As to the SSA dragging their feet - they want to reduce their (taxpayers', essentially) liability as well. However, once they decided in your favor, you received what was rightfully yours, including back-pay. SSA benefits are taxable, in the year received. So you got a lump sum - taxable as a lump sum. Sorry, but that's the way it is. This is an example where post-tax LTD premiums don't actually pay off...