What Can I Withdraw From My IRA Without Penalty?
There are multiple strategies available to you for withdrawing money from an IRA without incurring a 10% penalty, although you may owe income taxes. Consulting a tax professional is key in understanding what may owe and completing all relevant forms.
Your payments can be tailored to reflect either your single or joint life expectancies without incurring a penalty, with exceptions provided if certain qualifying medical or disability expenses or buying your first home arises.
Tax-Free Withdrawals
Although the 10% early withdrawal penalty was designed to deter people from withdrawing too soon from their retirement savings accounts, there are exceptions which apply: these include withdrawals made for death or disability-related costs up to 7.5% of adjusted gross income as well as first-time homebuyer expenses.
SEP or SIMPLE IRA plans (retirement accounts for self-employed workers and small businesses) allow their beneficiaries to withdraw funds without penalty for qualified acquisition costs of purchasing their primary residence (such as purchase price and customary settlement costs). However, this limit is set at $10,000 per homebuyer. Furthermore, nondeductible contributions made can also be withdrawn without incurring a 10% penalty fee.
In-Kind Withdrawals
Traditional, rollover, SEP or SIMPLE IRAs allow you to invest your money tax-free; however, when withdrawing the funds you’ll owe taxes.
Withdrawing any amounts from an IRA before age 59 1/2 can incur income taxes and typically a 10% penalty; however, there may be exceptions if distributions are taken due to certain qualifying reasons.
Eligible expenses and premiums include qualified medical expenses and health insurance premiums for your family as well as unreimbursed home purchases. Furthermore, penalty-free withdrawals for college costs may be available if attending at least half time and meeting other requirements are met.
If you want to take a distribution without selling shares for cash, an in-kind transfer may be the solution. To complete this transaction successfully requires coordination amongst your IRA custodian, issuer of asset being transferred over and broker handling transaction.
Active Duty Withdrawals
If you are called up for at least 180 days of active duty or longer, money from your IRA can be withdrawn without incurring penalties; however, you will need to include it as part of your taxable income for that year.
Avoid early withdrawal penalties by taking distributions under the “substantially equal periodic payment” exception. Under this option, a set annual amount based on your life expectancy, determined by the IRS, will be sent directly into your bank account for at least five years.
Other exceptions allow you to access your IRA without incurring penalties and additional taxes for certain expenses, including purchasing your first home (up to $10,000), medical expenses exceeding 7.5% of adjusted gross income and health insurance premium payments while unemployed for 12 weeks.
Disablement Withdrawals
Most savers opt for tax-deferred plans like Traditional, Roth or SIMPLE IRAs when investing for retirement. Contributions typically don’t incur taxes until withdrawal time; early withdrawals typically incur a 10% penalty unless an exception applies.
An IRA owner who suffers the loss of a spouse or children due to death or disability can access funds without penalty from their IRA account, in addition to covering unreimbursed medical expenses that exceed 7.5% of their adjusted gross income.
Under a new law, retirement savers with certain disabilities are exempt from penalties for withdrawing IRA funds before age 59 1/2. This includes conditions which can reasonably be expected to result in their death within 84 months, first-time home purchases, or higher education expenses that fall within that window.
Inherited Withdrawals
The IRS allows non-spouse heirs to withdraw IRA funds without penalty for certain expenses, including first home purchases or education expenses; they’ll still owe income tax on this withdrawal amount, however.
Spouses who inherit traditional IRAs have three options for dealing with them. They may either treat it as their own by designating themselves as account owners; roll it into their existing, tax-free IRA; or leave it as an inherited account and take required minimum distributions annually.
Alternatively, non-spouse heirs could use an annuity factor method to stretch out distributions over their lifetimes and avoid withdrawal penalties.
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