Will I owe taxes if I make a withdrawal from my Later account?

Article author
Hoang P.
  • Updated

This is provided for informational purposes only. Acorns does not provide tax or legal advice. You should consult with a tax or legal professional to address your particular situation.

Whatever your type of IRA, you may get certain tax benefits from investing for your long-term future through Later. That also means that if you make a withdrawal before you’ve reached the minimum distribution age of 59½, you may owe taxes or a penalty. Here’s what might happen if you make an early withdrawal from your Later account, broken down by account types (To see which type of Later account you have, go to “Later starts today” > tap on the Gear Symbol at the top right hand corner).

Traditional IRA. Because you’ve already paid income taxes on money you contribute to a traditional IRA, you may be able to deduct it, which can lower your tax bill today by letting you postpone paying income taxes on money set aside until you withdraw it. If you take out any cash before the minimum distribution age, you may owe regular income taxes, plus, in most cases, a 10-percent penalty.

SEP IRA. Simplified Employee Pension (SEP) IRAs—the account for side giggers and other self-employed people—works in much the same way: Any money withdrawn before the minimum distribution age may be subject to regular income tax and a 10-percent penalty.

Roth IRA. A major perk of Roth IRAs is that because you’ve already paid taxes on the money you contribute today, you won’t pay taxes on what you withdraw in retirement. That means you can access your contributions anytime without penalty. However, if you tap any investment earnings (a.k.a. the market returns your invested money has generated) before the minimum distribution age—or before you’ve had your account open for at least five years—you’ll generally owe income tax, plus the 10-percent penalty.

Is there any way around these penalties?

You can avoid the penalties on early withdrawals if you’re using the money (up to a max of $10,000) to buy, build or rebuild a first home or need it due to a disability. Check the IRS website for additional exceptions. Keep in mind you may still owe income taxes.

Be sure to talk to your CPA or tax professional or visit the IRS website for more information about the implications of early withdrawals.

 

Will I be exempt from IRS penalties on early withdrawals from my Later Account?

There are tax implications (generally a 10% penalty and possibly income taxes and other penalties) for early withdrawals from an IRA, but sometimes the IRS will waive a tax penalty for early withdrawals. We’ve listed some of the exceptions below. The IRS also talks about this here. Please talk to a tax specialist before making any decisions.

Qualified Reservist Distributions (QRDs) - These are for military members who were called into active duty from the reserves for over 180 days.

Disability - The IRS defines disability as “total and permanent disability of the IRA owner.” To qualify for this exemption, your condition must prevent you from working.

Death - Please contact us if you are the beneficiary or trustee of an Acorns Later account. Legal documents may be required.

Education - IRA funds may sometimes be withdrawn without tax penalty for higher education expenses. Talk to a tax specialist about your options.

Medical - The IRS splits medical exemptions into two categories: unreimbursed medical expenses and medical insurance if you are unemployed.

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