I'm Old Enough to Take a Penalty-Free IRA Withdrawal. Should I?

There's a reason savers get a tax break in the course of funding an IRA. The IRS wants to encourage workers to set money aside for retirement, so traditional IRA contributions go in tax free.

In exchange, though, there's a pretty steep penalty for tapping an IRA early. And so if you take a withdrawal prior to age 59 ½, the IRS will slap you with a 10% penalty on the sum you remove.

There are exceptions that allow you to access your IRA funds prior to age 59 ½ without a penalty. You can take an IRA withdrawal to pay for higher education or buy a home for the first time without losing 10% of your distribution amount. But otherwise, you need to be really careful about taking an early IRA withdrawal.

But what if you've already reached the age of 59 ½? At that point, you're able to access the money in your IRA whenever you want, and without a penalty to worry about. But that doesn't mean you should rush to withdraw funds without giving it thought.

It pays to keep your money in your IRA as long as possible

If you have a pressing reason to take an IRA withdrawal and you're old enough to do so penalty free, then you're better off doing that than, say, racking up credit card debt to access the money you need. But be careful when taking an IRA withdrawal for a less important reason.

First of all, if you remove funds from a traditional IRA, you'll pay taxes on them. This is not a penalty -- it's the same sort of tax that applies to the income you collect in paycheck form, but it's an expense you'll have to account for nonetheless.

Also, when you take money out of an IRA, it means you're no longer investing that money and letting it grow. So, let's say you're around 60 years old and you're investing your IRA somewhat conservatively due to being closer to retirement age. The stock market has, over the past 50 years, delivered an average annual 10% return before inflation, as measured by the S&P 500. But if you're only partially invested in stocks, your IRA may only be delivering, say, a 6% yearly return.

Even so, let's say you remove $10,000 from your IRA at age 60 and don't retire until age 70. Your $10,000 withdrawal will actually cost you about $18,000 in lost retirement income when you factor in lost growth.

Think carefully before you take a withdrawal

It may be that you're looking to tap your IRA because you've encountered an emergency home repair, or because you're retiring early after having spent years saving a bundle. That's your right, and once you're 59 ½, you don't have to worry about penalties.

But before you take an IRA withdrawal, you may want to ask yourself:

• Do I really need this money right away?
• Do I have money in my regular savings account to use instead?
• Am I behind on saving for retirement, and will this withdrawal put me at risk of struggling financially once I stop working for good?

These are all important points to consider before you take an IRA withdrawal at any age -- even an age when there's no penalty involved.