Rules for Cashing in an IRA
If you’re contemplating cashing out an IRA, there are various rules that you should keep in mind before taking any steps. Consult a financial advisor or tax professional before taking any definitive steps.
Your funds may be withdrawn without penalty to cover costs related to buying, building or rebuilding your first home, such as making down payments on it for yourself and any eligible family members.
Early withdrawals of an IRA incur a 10 percent penalty fee unless certain exceptions apply. One such exception is when using your money for qualifying higher education expenses for yourself, your spouse or any of their children and grandchildren – this includes tuition fees and room and board costs. Another exemption occurs if you’re an active duty military member expected to serve continuous active duty for 180+ days or indefinite periods and you receive your distribution from an IRA or annuity owned for over five years without penalty being assessed against it.
Owners and plan participants over 70 1/2 must begin taking required minimum distributions (RMDs) from their accounts by April 1 of the year following their 70 1/2th birthday, per the CARES Act. Withholding was previously in place at 20%.
You usually must pay a 10% penalty if you withdraw funds from your retirement account before reaching age 59 1/2, in addition to any potential income taxes you might owe. But there may be exceptions, in which you may withdraw your money penalty-free from an IRA account.
One exception to the penalty rule applies when withdrawing funds from an IRA to cover first-time homebuyer costs, including expenses related to purchasing, building or rebuilding your home as well as “any reasonable and customary settlement, financing and closing costs”.
Another exception applies if you withdraw funds from your IRA to pay for qualified higher education expenses for yourself, your spouse or children enrolled at least half-time at school – tuition, fees, books and room and board are eligible costs. Furthermore, an IRA withdrawal can also be used for medical expenses that exceed 7.5% of adjusted gross income or in cases where total and permanent disability exists.
There are various instances when IRA owners can withdraw funds without incurring a 10% penalty, including first-time home buyers and those who have experienced job loss.
As a first-time homebuyer, you are eligible to withdraw up to $10,000 of IRA funds without incurring a penalty fee – this applies to both traditional and Roth IRAs. Please be aware that taxes may still apply on this withdrawal.
An Individual Retirement Account can also help cover the costs of purchasing or renovating an existing home, but there are strict restrictions as to where this money can be spent.
An IRA can also help pay the premiums for health insurance for yourself, your spouse and any dependent children. Furthermore, distributions made for unreimbursed medical expenses that exceed 7.5% of adjusted gross income may also be taken from an IRA in the year that these expenses were incurred and subject to minimum required distribution (RMD) rules based on life expectancy.
Retirement accounts were meant to fund your retirement years, not be used as short-term sources of liquidity. If you use an IRA for purposes other than intended, such as immediate liquidity needs, penalties may be assessed against it; however, there may be circumstances under which withdrawals from it can be done without incurring penalties as long as strict rules are adhered to.
Transfer or direct rollover is an efficient and tax-efficient method for moving funds from an employer plan into an IRA without incurring taxes. An indirect rollover allows you to receive money from the former plan provider that must then be deposited within 60 days into your new IRA account.
No matter your circumstances or desired destination, NerdWallet’s ratings for direct and indirect rollover options take into account ease of opening an IRA, investment choices, fees/minimums/customer service/mobile app capabilities as well as independent reviews by our editorial team to make their assessment.