What Can I Withdraw From My IRA Without Penalty?
Withdrawals made prior to age 59 1/2 are generally subject to both income tax and a 10% penalty; however, there may be exceptions.
Consult with your financial institution about all available methods for withdrawing funds from your IRA. Some may provide same-day wire transfers, while others might send you a check; they’re there to help find you the fastest and least expensive ways of accessing them.
Unreimbursed Medical Expenses
The IRS permits withdrawals from an IRA without penalty to cover unreimbursed medical expenses; however, withdrawals for this purpose are limited to 10% of your adjusted gross income.
Your IRA funds may also be withdrawn without incurring penalties to cover legal adoption of a child; however, this must occur within 12 months after adoption was officially finalized.
If you are unemployed and receiving unemployment compensation payments of at least 12 weeks, a penalty-free distribution from your IRA may be available to pay health insurance premiums. To qualify, simply have to have lost your job and reported this withdrawal as income in that particular year by filling out IRS Form 5329.
Unemployment Compensation
Although withdrawals from an IRA are permitted penalty-free under certain circumstances, it’s wise to carefully consider all your options before withdrawing funds from it. Not only would you incur income tax on what is withdrawn but you would also forgoing any future growth potential it might have had.
Anyone meeting the IRS definition of permanently disabled can withdraw funds from their IRA without incurring penalties. To qualify, an individual must have received unemployment compensation for 12 weeks or more and been unable to engage in any substantial gainful activity.
You can bypass the 10% penalty when withdrawing funds from your IRA to cover qualified education expenses for yourself, your spouse or children. This includes tuition fees, books, supplies and equipment required for enrollment as well as room and board payments when the student enrolls at least half-time in school.
Permanent Disability
Under normal circumstances, withdrawals made from traditional and Roth IRAs before age 59 1/2 will incur income taxes and a 10% penalty from the IRS. If withdrawing funds to cover medical expenses or unemployment compensation payments of 7.5% of your adjusted gross income or more are made early then any penalties could be waived by doing so.
Permanent disability exception to the 10% penalty can be used to pay medical bills and higher education expenses of family members, among other purposes. Before withdrawing funds, be mindful of both its costs and benefits as any distributions could incur federal and state taxes while forfeiting potential long-term growth potential. In any event, repay the money within 60 days otherwise it will become lost forever.
Qualified Education Expenses
Traditional and Roth IRAs allow early distributions for qualified education expenses prior to age 59 1/2 without incurring penalties, such as tuition, books and room and board costs incurred while attending an eligible institution at least half-time.
These expenses may also be covered through other sources, including savings accounts, 529 accounts and 401(k) plans; however, using retirement funds to cover college costs could affect financial aid eligibility.
IRS requires meticulous recordkeeping in order to prove that withdrawals meet the educational expense exception, so consult your tax professional for details. Withdrawals used to cover qualified birth or adoption expenses do not trigger an early withdrawal penalty of 10% as these expenses are considered an investment into future development of children.
Homebuying
IRS rules allow first-time homebuyers to withdraw up to $10,000 tax-free from traditional or rollover IRAs as a contribution towards their down payment, better financing terms, or to avoid private mortgage insurance premiums without incurring penalties or additional costs. This can help make homeownership easier.
However, withdrawing can incur an income tax penalty and state taxes may apply on any amounts taken out. Before withdrawing funds from retirement savings accounts or opening an IRA account to fund other needs it would be wiser to explore alternative financing solutions; you could potentially miss out on years of compound growth and contribution limits are typically low for these options.
Remember when withdrawing funds from an IRA that they cannot be replaced until reaching the required distribution age. If you need access to those funds for something other than buying a house, other funding solutions might be better suited.
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