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

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 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 “Invest for your future” in the mobile app and select “Later” on the subsequent screen. Your account type is listed under “Account Details” on the Later screen.)

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Pension (SEP) IRAs—the account for side giggers and other self-employed people—works in much the same way: Any money withdrawn before the minimum distribution age may be subject to regular income tax and a 10-percent penalty.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

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