You can cash out a rollover IRA whenever you want. The account is in your name, so the custodian has to process the distribution once you complete the paperwork. The cost is what matters: the full withdrawal is taxed as ordinary income in the year you receive it, and if you are under 59½, the IRS adds a 10 percent early withdrawal penalty unless you qualify for an exception.
What You Owe in Income Tax
Every dollar you pull out is ordinary income for that year. Rollover IRAs typically hold pre-tax money that came out of a 401(k), 403(b), or similar employer plan, so you never paid income tax on those contributions going in and you owe it coming out.1Internal Revenue Service. Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs) The distribution stacks on top of your wages and other income, which can push you into a higher federal bracket and raise the effective rate on the rest of what you earned.
Your custodian withholds 10 percent for federal income tax by default. You can elect anywhere from zero to 100 percent, but if you choose too little, expect a large balance due in April, and possibly an underpayment penalty on top. Some states also require withholding, with rates that vary. Run the numbers before you file the request so the withholding roughly matches what you will actually owe.
The 10 Percent Early Withdrawal Penalty
If you are younger than 59½ when the money leaves the account, the IRS charges an additional 10 percent tax on the taxable amount. That is on top of the regular income tax.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Take $50,000 while sitting in the 22 percent federal bracket and you owe roughly $11,000 in income tax plus another $5,000 as the early withdrawal penalty. That is about $16,000 in federal tax on a $50,000 withdrawal, before state income tax.
You report the penalty on IRS Form 5329, filed with your annual return. If you qualify for one of the exceptions below, the same form is where you claim the exemption.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Ways to Avoid the Penalty
Several situations let you take money out before 59½ without the 10 percent charge. In every case the distribution is still taxable as ordinary income; only the penalty is waived.
- Total and permanent disability, certified by a physician as a condition that prevents substantial gainful activity and is expected to last at least 12 months or result in death.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income for the year.
- First-time home purchase, up to a $10,000 lifetime cap per person. “First-time” means no ownership interest in a main home during the previous two years. A qualifying spouse can use a separate $10,000.1Internal Revenue Service. Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)
- Qualified higher education expenses (tuition, fees, books, supplies, required equipment) at an eligible institution for you, a spouse, a child, or a grandchild. Room and board qualify if the student is enrolled at least half-time.4Internal Revenue Service. Publication 970, Tax Benefits for Education
- Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 consecutive weeks.
- Distributions taken because the IRS levied your IRA.
SECURE 2.0 added two more exceptions for distributions after December 31, 2023. Victims of domestic abuse by a spouse or domestic partner can withdraw the lesser of $10,000 (inflation-adjusted) or 50 percent of the account balance, with three years to repay. Anyone facing an unforeseeable or immediate financial need can pull up to $1,000 as an emergency personal expense distribution; if you repay within three years, you can take another one, and if you do not, you have to wait three years before using this exception again.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Substantially Equal Periodic Payments
If you need ongoing access before 59½ and no one-time exception fits, you can set up a series of substantially equal periodic payments, sometimes called a SEPP or a 72(t) plan. You commit to a fixed annual distribution calculated from your life expectancy (or the joint life expectancy of you and a beneficiary). Every scheduled payment is penalty-free.5Internal Revenue Service. Substantially Equal Periodic Payments
The commitment is strict. You have to continue the payments for at least five years or until you reach age 59½, whichever comes later. Modify the amount or stop early and the IRS retroactively applies the 10 percent penalty to every distribution taken under the plan, plus interest. You cannot add contributions or take extra withdrawals while the plan is running. Because of that inflexibility, a SEPP fits someone with a predictable multi-year income need, not someone who wants a lump sum.
If You Change Your Mind: The 60-Day Rollover
Cash the money out and then think better of it? You generally have 60 days from the date you received the funds to redeposit them into the same or another IRA. Complete the redeposit in that window and the IRS treats the whole thing as a rollover, with no income tax and no penalty on the amount returned.6Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Two limits shape this option. You can only do one 60-day rollover between your IRAs in any 12-month period, and that limit applies across all your traditional, Roth, SEP, and SIMPLE IRAs combined. And if the custodian already withheld taxes, you have to make up the withheld portion from other cash to roll over the full original balance; otherwise, that withheld piece counts as a taxable distribution.
If you miss the 60 days for reasons outside your control, such as a hospitalization, postal error, or natural disaster, the IRS has a self-certification procedure. You complete a model letter from Revenue Procedure 2016-47 explaining the delay and give it to the receiving financial institution. The rollover has to happen as soon as the obstacle clears, typically within 30 days.7Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement
How to Actually Request the Money
Most custodians handle distribution requests through the online account portal, though some still take them by phone or mail. You will need your account number and a decision on whether to withdraw a specific dollar amount or liquidate the whole account. If the IRA holds stocks, bonds, or mutual funds, the custodian sells those positions first to raise cash; trades now settle in one business day under the T+1 cycle.8Investor.gov. New T+1 Settlement Cycle – What Investors Need to Know
You will pick a delivery method, usually an electronic transfer to your bank (requiring routing and account numbers) or a mailed check, and set your federal tax withholding. Skip the election and the custodian applies the 10 percent default. If the distribution will land you above the 10 percent bracket, elect a higher rate so you are not stuck with a large balance the following April.
Funds generally arrive three to five business days after the trade settles, depending on delivery method. Check that the amount deposited matches what you expected after withholding. The following January, the custodian sends IRS Form 1099-R reporting the gross distribution and the taxes withheld; you need it to file your return.9Internal Revenue Service. Instructions for Forms 1099-R and 5498
What You Give Up by Cashing Out
One consequence is easy to miss. Money inside an IRA has strong protection from creditors in bankruptcy. Rollover amounts that originated in a qualified employer plan like a 401(k) are generally fully exempt, and traditional IRA contributions are protected up to a statutory cap that adjusts periodically. Once the funds are in a regular bank account, that protection is gone. If you are heading toward a possible bankruptcy filing, the timing of a cash-out is worth thinking through before you submit the request.