Saving money in an IRA is one of the best moves you can make for your retirement. Currently, workers under 50 can put in up to $6,000 a year, while those 50 and over can put in up to $7,000. Over time, that money can be invested so that it grows into a larger sum -- ideally, enough to pay for a comfortable retirement.
Saving in a traditional IRA offers the additional benefit of an up-front tax break. That's because contributions are tax-deductible, thereby saving you money any year you make them.
But that benefit comes at a cost, and it's that the IRS wants you to keep your money locked away in that IRA until you're at an age when retirement becomes feasible. In fact, if you attempt to take a withdrawal from your IRA before turning 59 1/2, you'll risk a 10% penalty on the amount you remove.
That said, there are a few exceptions to this rule. You can take an early IRA withdrawal to pay for college, and you can remove up to $10,000 if you're using the money as a down payment for a first-time home. There are other exceptions to the early withdrawal penalty rule, like needing the money to pay for medical costs that exceed 10% of your adjusted gross income or to cover your living costs upon becoming disabled, but whereas these circumstances are generally unavoidable, paying tuition and buying a home fall into a very different category. As such, for the purpose of this discussion, we'll assume that you're thinking about taking an early IRA withdrawal for a reason you can indeed control.
With that in mind, let's be clear: Removing funds from your IRA ahead of schedule is just plain not a good idea. Even though you can get out of that early withdrawal penalty, you'll lose out in another way by raiding your account before you're actually ready to retire.
You need that money for your golden years
The problem with removing funds from an IRA to pay for college or a home is that the money in that account is supposed to pay for your retirement. And the more you withdraw during your working years, the less you'll have when you're older and really need the cash.
If you have a job, or are capable of working one, then there's no reason to raid your IRA for a home down payment when you could instead delay that milestone until you've saved up the money for it separately. Similarly, there is the option to borrow for college affordably, or, in the case of going back to school mid-career, delaying those studies until you've saved enough to pay for them.
Once you're retired, however, you may not have the same options for generating income. Though many seniors work during retirement, if your health declines later in life to the point where you can't hold down a job, then earning extra money may not be an option, whereas it is on the table today.
Furthermore, whenever you take an early IRA withdrawal, you don't just lose out on the principal amount you remove; you also lose out on the growth that money could've achieved. Imagine you withdraw $10,000 at age 37 to buy a home. If your investments normally generate a 7% average annual return, and you retire at 67, you'll actually end up losing out on $76,000 in retirement income. And that's a bigger deal.
Therefore, while you can get at the money in your IRA before age 59 1/2 without incurring a penalty in some cases, doing so isn't advisable. You're much better off working a side job or taking other steps to boost your income to pay for more immediate needs, and leaving your retirement cash for its intended purpose -- your golden years.