What Can I Withdraw From My IRA Without Penalty?
IRAs are powerful tools for saving and planning for retirement, but it’s important to understand their rules to avoid costly errors and reach your dream retirement safely.
Distributions made prior to age 59 1/2 from an IRA are subject to income tax and a 10% penalty; however, there may be exceptions.
IRAs are intended to help people save for retirement, but unexpected expenses may require withdrawals early from these accounts. When taking withdrawals early there are several considerations such as paying a 10% penalty and taxes on what has been taken from an IRA before age 59 1/2 is reached.
Advisors generally advise against early withdrawals unless absolutely necessary, such as paying medical expenses or purchasing your first home. Withdrawing early from an IRA means giving up years of tax-deferred growth while incurring penalties and taxes; to minimize these effects it’s wiser to look into alternative means of covering expenses before using retirement savings as emergency funding.
Penalties may be waived if your unreimbursed medical expenses exceed 7.5% of income, if you become totally and permanently disabled or pay health insurance premiums for yourself, spouse and children while unemployed. Furthermore, this rule can also be relaxed if funds are withdrawn to buy, build or rebuild your first home as well as being named as beneficiary of an IRA account after its owner passes away.
Required minimum distributions
The Internal Revenue Service requires you to withdraw a minimum annual amount from certain types of retirement accounts known as required minimum distributions (RMDs). If you withdraw before age 59 1/2 from an IRA, there may be an early withdrawal penalty of 10%; however there may be situations in which this penalty doesn’t apply.
IRS Publication 590-B offers rules for calculating an RMD, along with an easy worksheet that makes this calculation. Your RMD formula depends on both age and life expectancy table information from IRS Publication 590.
An IRA allows you to withdraw penalty-free funds for home and medical expenses incurred, or in the case of unemployment expenses for up to 12 weeks, without incurring penalties. Beneficiaries who inherit an IRA may also withdraw funds without penalty.
Before the age of 59 1/2, savers who withdraw funds from retirement accounts such as IRAs or 401(k)s typically incur a 10% early withdrawal penalty on top of income taxes; however, in certain circumstances this rule does not apply.
Example: Traditional IRA withdrawals taken for unreimbursed medical costs that exceed 7.5% of your annual adjusted gross income don’t incur the 10% penalty, while this exception doesn’t apply to 401(k) withdrawals taken due to medical costs.
As another option to avoid penalties in certain instances, you could consider taking “substantially equal periodic payments” for at least five years or until age 59 1/2, whichever comes first. It is important to work with a tax professional when using this complex rule as getting it wrong could prove costly; one mistake could void your exemption and require paying a substantial recapture penalty plus interest. More information on this topic is available through IRS Publication 590-B.
IRA owners generally can withdraw their investment earnings at any time without incurring penalties, since account contributions were made using pre-tax dollars and taxes are only payable upon withdrawal.
However, the IRS does impose restrictions on withdrawals from an IRA account. In general, withdrawals must follow a “last-in first-out” rule where earnings from your account are taken out first before principal contributions or principal are released back into your IRA account – this rule applies both traditional and Roth IRAs.
An IRA owner purchasing a home may withdraw funds to assist with the purchase, without incurring penalties. Other exceptions may include unreimbursed medical expenses and unemployment compensation benefits. Military reservists called to active duty for 180 days or longer or indefinite periods also can access their accounts without penalties; they would owe income taxes.