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Is it true that you can access the money from an IRA at any time without a penalty? A friend of mine said the gains would be taxed, not the principal.)


You raise two separate issues: taxes and penalties. Whether either can be assessed, and on what, depends on how old you are and what kind of IRA you have. Let’s start with a traditional IRA, which allows you to reduce your taxable income by the amount of your contributions. That means it is tax deferred, not tax free. When you start to withdraw the money, it will be treated as ordinary income and taxed accordingly. If you’re 59 and a half or older, then that tax is all you have to pay. If you’re younger than that, there is a 10 percent penalty on the amount withdrawn. The penalty is there to discourage accountholders from making withdrawals until retirement, which is what IRAs are intended to fund.
Your friend may have been alluding to a different kind of IRA, a Roth. A Roth is funded with dollars that have already been taxed, so you’re all square with the Internal Revenue Service, at least as far as your original contributions are concerned. The income and other investment returns that accrue in a Roth over the years have not been taxed, however. If you’re over 59 and a half the IRS will let you take withdrawals tax free, even including the investment gains. If you’re younger, you can take out the amount of your original contributions tax free, because they have already been taxed, but any gains will be taxed as ordinary income and an additional 10 percent penalty will apply.
If all of this seems complicated, consider that if you converted a traditional IRA into a Roth, then additional rules come into effect; the main one is that even if you’re younger than 59 and a half, the 10 percent penalty on withdrawals of investment gains doesn’t apply if at least five years has elapsed since the year of the conversion. There are various other circumstances that could result in penalties being waived, too, such as disability or use of the money to buy a home, pay for education and so forth.
-Conrad de Aenlle