What are the taxes and penalties for early withdrawal from your traditional IRA account?

I would like to use some of the money in my traditional IRA to invest in a business. Would this be advisable?

It appears you may be confusing some issues…

To answer your question directly: Withdrawing money from a traditional IRA works like this:

  • Your withdrawal will be counted as income to you and taxed at income tax rates
  • If you’re younger than 59 1/2, you’ll also face a 10% early withdrawal penalty

You then ask whether it would be advisable to invest money in your traditional IRA in a business… and I’m not clear about the connection between that question and the question about taxes and penalties, so I’ll answer that from a couple of perspectives:

  • The most common type of investment for IRA’s is businesses in the form of publicly traded stock. Since that is so common and clearly easy to do with nearly any IRA, I’ll assume what you mean by “invest in a business” is “invest in a PRIVATE business (not traded on the stock market)”.
  • Whether it would be advisable to invest in a private business with your IRA funds is a function of the quality of the business and it’s suitability to your needs. It’s impossible to answer that question with the information you’ve provided. But there’s no reason that it is fundamentally unwise to invest in a private business with your IRA funds.
  • If you’re asking about withdrawals because you think it will be necessary to withdraw money in order to purchase a private business, I’ve got good news for you: You can absolutely invest in private businesses INSIDE of your IRA without making a withdrawal so you don’t take a tax hit. To do that, just transfer the necessary capital from your current IRA into an IRA at a self-directed IRA custodial company (for example: Equity Trust, PENSCO or Quest IRA) and direct them to make the investment using your IRA funds.
  • There are some circumstances under which it would be considered a prohibited transaction for your IRA to invest in a private business - such as in the instance when you own a controlling interest and receive a salary from the business - but it’s easy enough to clarify these issues ahead of time by consulting an excellent self directed IRA lawyer ahead of time.

Happy Investing!

 

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