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Making a mistake investing with your IRA can have serious penalties. If you pull money out of your traditional IRA, you need to pay taxes due on the new income, which could potentially move you up a tax bracket. You also will owe ten percent of the withdrawal amount as penalty payment to the IRS. This can add up quickly, seriously damaging your nest egg!

With a Roth IRA your penalties are similar, but you’ve already pre-paid tax on your contributions, so you won’t be assessed income tax on the principal. Possibly, you will owe income tax on the interest that has accumulated, and in any case you’ll still get hit with the 10% IRS surcharge.

IRA penalties will be due if you withdraw cash from your IRA before it’s time to disburse it, but you may also find yourself paying IRA penalties in certain other situations. For instance, if you have been self-investing your IRA and make the mistake of investing in something you take too close an interest in - for example, you’ve invested in a building that you also lease an office in - you may find yourself paying for what the IRS has determined is an early disbursement.

To make matters worse, if you over contribute, you may find yourself penalized. Penalties for over contributing include the assessment of late taxes, fines, and other charges. You want to neither over nor under contribute, but invest exactly the right amount in your IRA.

This doesn’t mean you can’t touch your IRA. In a few cases, you can withdraw money from your IRA penalties-free, but you must understand what you’re doing and how the different rules apply to your IRA. It’s easier to use a Roth IRA in this way, but even a traditional IRA can be a source of cash in certain situations.

You may withdraw money from your IRA without incurring a penalty if you are purchasing a home for the first time in two years. You and your spouse are also eligible to withdraw up to $10,000 for yourself if you are using the cash for your own home, or that of your grandchildren, parents or child. The limit on this withdrawal is 10 thousand for your lifetime. You may also withdraw cash to use on certain qualified educational expenses.

In case of unemployment, your IRA may be used to pay for medical insurance, but only if you’ve been unemployed for 12 consecutive weeks. IRAs may also fund medical expenses if they qualify and exceed 7.5% of your gross income. If you are disabled, you may withdraw from your IRA as if you were already retried. Also, if you are a qualified reservist and called to active duty, you might be able to escape the 10% fee, although you should check with your command about this (rules are changing as we are calling more people up). Finally, in the case where your life expectancy might be dramatically shortened, you may be able to have your IRA disbursed early without penalty.

In no case should you withdraw money from your IRA without good reason, regardless of penalization. IRA penalties are there to protect you and your retirement investment. If you were allowed to withdraw money whenever you want, the constant temptation would likely lead to a lot of IRAs being used as personal piggy banks. Instead, protect your IRA and pull money from it only when it’s absolutely necessary and when it will be a major benefit to your life, helping you build toward retirement rather than just helping you out today.