What Can I Withdraw From My IRA Without Penalty?
If you withdraw money from an IRA before age 59 1/2, typically there will be a 10% penalty charged against it. But there are exceptions.
Your IRA allows for penalty-free withdrawals if the distribution is used to purchase your first home or cover health insurance premiums for you and/or your spouse.
1. In-Kind Distributions
If you take an “in-kind” distribution from an IRA in the form of assets other than cash, this transaction is known as an “in-kind distribution”. Care must be taken when considering its fair market value; additionally, any taxes due may need to be paid when taking such action.
If the value of your IRA holdings has diminished at the time you need to take required minimum distributions (RMD), transferring them directly from an IRA into a taxable brokerage account may make sense and help avoid paying a large capital gains tax bill while maintaining exposure to markets.
In-kind withdrawals may also prove useful in other circumstances, such as purchasing a home or meeting the terms of an inheritance. Speak to your financial or tax advisor to see if this strategy would make sense for you.
2. Qualified Education Expenses
When you withdraw IRA funds before age 59 1/2 to pay for qualified education expenses such as tuition fees, books and supplies necessary for enrollment as well as room and board, no penalties apply. You may use this money for either yourself, your spouse, child or grandchild’s education expenses.
However, for this exception to apply the school must be either public or non-profit postsecondary institution and participate in student aid programs administered by the Department of Education. Furthermore, payments should be made in the same year that qualified expenses are incurred and no more than their value are withheld from withdrawals. If you need more guidance with this exception please reach out to a tax professional for guidance.
3. Qualified Health Expenses
Rothstein states that the IRS typically doesn’t impose an early withdrawal penalty from an IRA to cover qualified medical expenses such as prescriptions and annual checkups as well as some procedures or long-term care insurance premiums.
Under these same rules, an early withdrawal without penalty for first-time home purchases of up to $10,000 is permitted. Withdrawals made to buy, build or improve primary residences also qualify.
An exception allows for penalty-free withdrawal if you become permanently and totally disabled, usually determined by a doctor’s diagnosis (although this can be challenged by the IRS). Its rules are fairly complex, requiring you to receive substantially equal periodic payments (SEPPs) according to one of several approved IRS methods.
4. Qualified Housing Expenses
If you withdraw money from an IRA to purchase a home, the penalty can be avoided. Qualified housing expenses include mortgage interest payments, property taxes and homeowner insurance premiums. Furthermore, first-time home buyers can withdraw without penalty funds for their first property.
Unlocked IRA distributions may be taken without penalty to cover uninsured medical bills that exceed 10% of your adjusted gross income, either for yourself, your spouse or dependents.
If your IRA provides regular, substantially equal periodic payments, withdrawals can be made each year without incurring penalties. The withdrawal amount will be determined by dividing your account balance by an annuity factor; payments must continue until age 59 1/2; however, you can avoid penalty if inheriting an IRA and starting making payments immediately.
5. Qualified Disability Expenses
The rules governing IRA withdrawals allow penalty-free distributions for qualified disability expenses such as specialized equipment, room and board and more. Determination of which expenses qualify as qualifying disability expenses lies solely with the Account Owner.
Other expenses eligible for penalty-free distribution from an IRA account include the purchase of your first home, certain unreimbursed medical expenses and health insurance premiums while unemployed. Furthermore, withdrawals without penalty may also be made in instances of COVID-19 related financial hardship.
Slott advises against making withdrawals from an IRA without first consulting with an experienced tax professional, to determine what federal and state taxes might need to be paid as well as ways of covering these expenses such as personal loans or other financing methods.
Comments are closed here.