What Can I Withdraw From My IRA Without Penalty?
People often use Individual Retirement Accounts (IRAs) to save for retirement, but sometimes you need access to those funds before your retirement date arrives.
If you withdraw money from an IRA before age 59 1/2, a 10% penalty may apply in addition to income taxes; however, there may be certain exemptions available.
You may be eligible to forgo paying the penalty if your funds are needed to cover qualified education expenses or uninsured medical costs.
Hardship Withdrawals
For expenses like medical emergencies, unreimbursed tuition costs or home-buying costs that arise during a given year – like tuition payments that were uninsured – the IRS allows penalty-free withdrawals from an IRA without incurring an additional 10% fee. However, you must use these funds within twelve months or face incurring a 10% fee as penalty fee.
You may take penalty-free distributions from your IRA in order to pay your health insurance premiums if you’re unemployed and without other sources of income, but do so only directly with the insurer.
One major drawback of taking out hardship withdrawals is having to pay regular income taxes and possibly an early withdrawal penalty of 10%, depending on your age and account type. Furthermore, those funds are no longer compounding, potentially costing you thousands in retirement income returns that would otherwise accumulate over time. O’Shea advises consulting a tax professional prior to making such withdrawals.
Qualified Medical Expenses
Your IRA allows for penalty-free withdrawals for qualified medical expenses, such as deductibles, copays and coinsurance payments. However, this exemption only applies if both health insurance premiums and out-of-pocket medical costs exceed 7.5% of your adjusted gross income.
Your IRA may also be used to cover uninsured health insurance premiums for yourself, your spouse and any dependent children if you become unemployed; this provides a way of maintaining coverage while looking for work elsewhere.
Traditional IRA account holders may make one withdrawal annually of up to $1,000 as needed in an emergency, without penalty. You can also take your RMDs, or required minimum distributions, without penalty if you’re at least 59.5 years old or disabled. Self-employed savers can make even greater strides towards saving with SEP-IRA or SIMPLE IRA options and may avoid incurring an IRS 10% withdrawal penalty by withdrawing money using an IRS approved method; more information can be found online as well as instructions for IRS Form 5329.
Home Purchase
Numerous states and cities provide financial assistance programs designed to assist first-time homebuyers afford their down payments on homes. These options could provide cash gifts or low-interest loans – much more appealing options than using retirement savings for this purchase.
IRAs are intended as long-term savings accounts, so tapping them early defeats their intended purpose. That’s why the IRS levies a 10% early withdrawal penalty on withdrawals made before age 59 1/2 on top of normal income tax rate; though there may be exceptions that allow an early withdrawal for home purchase such as medical costs, higher education expenses or death or disability of an immediate family member.
At any rate, time limits on using your IRA home purchase exemption can be tight; you only have 120 days from withdrawing money from an IRA to close on a property and avoid incurring the 10% penalty and losing years of compound growth.
Active Duty
IRAs are intended for long-term retirement savings, and withdrawals prior to age 59 1/2 typically incur a 10% early withdrawal penalty in addition to taxes. But there may be exceptions; here are three cases in which withdrawals from an IRA without penalties could be necessary.
Example: An IRA provides penalty-free distributions that allow you to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income or the cost of college degrees for you, your spouse, children or grandchildren.
An exception allows you to withdraw money from a traditional IRA without incurring penalties in order to finance the purchase of your home, though it is wiser to weigh all available sources of cash before considering such withdrawal. It may be prudenter to wait until you are financially stable before considering such withdrawal. Otherwise, valuable time for investments to grow may be lost.
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