What Can I Withdraw From My IRA Without Penalty?
When withdrawing funds from an IRA, generally speaking you must pay taxes and penalties; however there may be exceptions.
You are eligible to make withdrawals without penalty from your IRA if you are first-time homebuying or paying medical expenses that aren’t covered by health insurance, as well as unemployment compensation payments.
First-time homebuyer
If you are a first-time homebuyer, withdrawing funds from your IRA without incurring the 10% penalty is now permitted. This also applies to spouses of first-time homebuyers and those investing in rental properties – this does not include inheritance IRAs though.
As with most IRA withdrawals, withdrawals from an IRA account are generally taxable and subject to the IRS’s early-withdrawal penalty unless an exception applies. However, Roth IRA accounts using LIFO withdrawal methods – where earnings are taken first before contributions or principal is distributed back – don’t incur this fee.
Traditional IRA withdrawal rules permit you to purchase your first home without penalty and withdraw funds up to an capped limit amount, as well as pay tuition, fees, and books related expenses in higher education. Furthermore, healthcare expenses exceeding 7.5% of adjusted gross income may also be deducted.
Medical expenses
If your medical expenses aren’t covered by health insurance or reimbursed from other sources, an IRA may allow you to cover them tax-free and without penalty. There may be restrictions as to the maximum withdrawal limit and expenses must qualify as qualified medical expenses, which typically includes annual checkups and prescriptions but doesn’t include elective procedures such as plastic surgery.
If you need money from your IRA to cover tuition expenses for yourself, your spouse or children, including room and board at college or graduate schools – these expenses qualify.
Withdrawals made prior to age 59 1/2 are generally subject to both income tax and a 10% penalty; however, you may be exempt from paying this fee when purchasing your first home, paying medical or education expenses, or buying certain assets such as stocks. Withdrawals made after death don’t incur the penalty either if they were transferred into either your surviving spouse’s IRA account or an inherited IRA account.
Unemployment compensation
Unemployment-related withdrawals of money from an IRA do not incur the usual 10% penalty fee. This rule applies if you’re collecting unemployment compensation due to being laid off, furloughed, reduced hours or COVID-19 related inability to work.
Your pension can also provide penalty-free distributions to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income or pay health insurance premiums for you, your spouse and dependents while unemployed – provided they meet certain criteria, according to Brittany Pederson of Georgia’s Own Credit Union in Atlanta. In order to take advantage of this exception, itemization of taxes isn’t necessary according to this exception.
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Death
Inherited IRAs can be used to cover expenses such as medical care and education; however, withdrawals are generally taxed at standard income tax rates; with exceptions like first-time homebuyers being allowed up to $10,000 of lifetime withdrawals in order to help purchase their home.
Unreimbursed medical expenses such as hospital bills or copayments may also be covered by an IRA without incurring penalties, while distributions could even be used to cover funeral costs.
Unemployment compensation payments can also be paid from an IRA, but the withdrawal must occur no later than 60 days after leaving work and no earlier. Beneficiaries who inherit an account whose owner died before 2020 can use something called a stretch IRA, which allows distributions over your or the deceased account holder’s life expectancies to ease distributions from this type of account.
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