What happens if I cash out my IRA early?

When a taxpayer cashes out a Traditional or Roth Individual Retirement Account before reaching age 59 1/2, the income is subject to both income tax and a 10 percent early distribution penalty. SIMPLE IRAs may have a 25 percent penalty assessed, according to IRS Publication 590.

Exceptions to the early distribution penalty include becoming disabled, having high medical expenses and paying medical insurance while unemployed. Buying or building a first home and paying higher education expenses may also qualify a taxpayer for the exception. IRS Publication 590 offers more detailed information on these. Income tax still applies even when the taxpayer meets an exception to the penalty.