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Contributing money to an IRA is one of the smartest financial moves you can make. And although the money sitting in that account is indeed yours, you can’t just cash out your IRA as you see fit. There are different rules surrounding both Roth and traditional IRA distributions, and if you withdraw money too early, you could face a hefty penalty and a larger tax bill than expected. That’s why it’s important to consider the implications before making a withdrawal from an IRA.
Roth versus traditional IRAs
Let’s quickly review the key difference between a traditional IRA and a Roth. With a traditional IRA, the money you contribute goes in with pre-tax dollars, which means you get a tax break up front but pay taxes in retirement on your distributions. Roth IRAs work the opposite way. Roth IRAs are funded with after-tax dollars, so there’s no tax break when your money goes in; but when the time comes to take withdrawals, your distributions are tax-free.
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