What Can You Withdraw From an IRA Without Penalty?
Idealistically, funds you invest in an IRA should remain invested until retirement; however, life happens and sometimes withdrawals must occur from an account.
Early withdrawals from an IRA generally incur ordinary income tax and a 10% penalty; however, certain exceptions apply in specific instances.
Home Purchase
Investment retirement accounts (IRAs) are designed to help you save for retirement. Under IRS rules, early withdrawals typically incur a 10% penalty and income taxes; however there may be exceptions where early withdrawals do not require this penalty fee. However there may also be circumstances where you can access funds directly without incurring this additional tax penalty fee.
One exception applies when buying your first home: withdrawals up to $10,000 can be taken out without penalty as long as the money is used in purchasing, building or reconstructing it within 120 days and closed on. Furthermore, these rules permit helping a child, grandchild or parent purchase their own first house with this money.
Avoid penalties if your payments from an IRA remain substantially equal and continue for at least five years without changing, though changing may incur penalties plus interest.
Education
Under IRA rules, withdrawals made for education expenses such as tuition fees, books and room and board are exempt from penalties, making this option ideal for use for yourself or an immediate family member.
Self-employed or small business owners can save even more using a SEP or SIMPLE IRA, unlike traditional IRAs which have contribution caps and withdrawal restrictions. With either account you can withdraw funds at any age without penalties.
Withdrawals from an IRA prior to age 59 1/2 usually incur income taxes and an early withdrawal penalty of 10%; unless an exception applies. You can avoid the latter if you are 55 or older and leaving employment; called up for active duty military service of more than 179 days; or using funds withdrawn to cover unreimbursed medical expenses that exceed 7.5% of adjusted gross income or purchase health insurance for yourself, spouse and/or children.
Medical
Brittany Pederson, Director of Deposits and Payments at Georgia’s Own Credit Union in Atlanta notes that penalty-free withdrawals from an IRA may be taken if used to cover unreimbursed medical expenses that exceed 10 percent of adjusted gross income. You can take advantage of this exception even if you do not itemize deductions.
Additionally, an IRA allows penalty-free withdrawals during periods of unemployment for health insurance premiums if you’ve received unemployment compensation for 12 weeks or longer. However, once you start a new job you cannot access funds more than 60 days post start date.
Social Security benefits generally don’t cover all the expenses of retirement, so tapping your savings to bridge any shortfall may make sense. Doing so without incurring an early withdrawal penalty of 10% should you follow certain rules – these same rules also apply to IRAs held by self-employed individuals and small-business owners (SEP or SIMPLE IRA).
401(k) Down Payment
Those withdrawing money before age 59 1/2 will incur a 10% early withdrawal penalty and income tax on any amounts they take out, intended to discourage people from raiding their retirement funds before reaching age 59 1/2 and reduce government assistance during retirement years.
There are occasions when withdrawal of funds without penalty can be used for education expenses, such as tuition fees, books and equipment at an eligible educational institution or room and board payments.
Medical expenses are another exception to this rule, as you can withdraw tax-free to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income or to pay health insurance premiums when unemployed. This strategy may be beneficial if a disability prevents you from working and earning an income stream.
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