What Can You Withdraw From an IRA Without Penalty?
An IRA is a tax-deferred retirement savings account, but with certain withdrawal rules. Withdrawals made before age 59 1/2 can incur taxes and a 10% penalty fee.
There are, however, exceptions. Here are a few instances in which withdrawing from an IRA without penalty may be appropriate: If unreimbursed medical expenses exceed 7.5% of adjusted gross income
First-time homebuyer exception
While the rule generally imposes a penalty on individuals who withdraw early retirement funds, there are circumstances in which this penalty may be waived. One such situation is when withdrawing up to $10,000 without incurring the 10% early withdrawal penalty.
The IRS defines a first-time homebuyer as anyone who has not owned a home within two years – even if you purchased and sold one five years ago and since have been renting. You could use your inheritance money to help a relative buy their first home as long as they meet IRS criteria for first-time buyers.
To take advantage of a penalty-free withdrawal, distributions must be used towards “qualified acquisition costs,” including purchasing new or preowned real estate within 120 days from when you made the withdrawal.
Roth IRA distributions used for educational expenses are free from penalties; this applies both to account owners and their spouse, children, descendants, as well as grandchildren of account owners. Unfortunately, this exemption doesn’t extend to Coverdell education accounts, while using these funds may impede eligibility for federal student aid through the Free Application for Federal Student Aid (FAFSA).
To be eligible for this exception, money must be withdrawn in the same year that an expense was incurred and from an accredited college or postsecondary school that participates in student aid programs administered by the Department of Education. Qualifying expenses include tuition fees, books and equipment that’s necessary for enrollment as well as room and board. Health insurance premiums paid on your behalf or those of dependents may also qualify; records should be kept of expenses you incur.
When withdrawing money from an IRA to cover medical expenses, generally there will not be a penalty charge; however, you should make sure the withdrawal amount is reasonable given your individual circumstances.
Your IRA allows you to take distributions without incurring penalties in order to cover qualified education expenses for yourself, your spouse and/or children – up to a lifetime limit of $10,000 withdrawals per withdrawal request.
If you are a first-time homebuyer, an IRA may provide tax-free funds for purchasing your primary residence. The only catch? No previous home ownership in the last two years must have existed before taking out this option.
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income can be withdrawn without incurring a 10% penalty, provided they occur either during or the year following withdrawal from an IRA or employer-sponsored plan such as TSP, 401(k), 403(b). You can also take penalty-free distributions for certain disability expenses you or family members incur.
An IRA does not impose a 10% withdrawal penalty when funds are withdrawn for certain reasons, such as being over the age of 59 1/2 and withdrawing funds to cover college expenses or medical costs that exceed 7.5% of your adjusted gross income and first-time homebuyer expenses up to $10,000.
You might not incur the early withdrawal penalty if you withdraw money from your IRA as a disabled retiree who meets Social Security disability requirements. However, this exemption is more stringent than the one for health care expenses; to qualify under it you must meet the IRS definition of disability — that is an inability to engage in substantial gainful activity due to mental or physical conditions expected to last a year or longer or lead to your death.
To qualify for this exemption, inform your financial institution of the disability withdrawal exemption and ask it to complete Box 7 of Form 1099-R with code 3 (this indicates an exception from penalty tax). Additionally, you will require a doctor’s statement attesting that you meet the definition of disability and expect your condition to persist for an extended period.