What Can You Withdraw From an IRA Without Penalty?
The IRS allows certain distributions from an IRA without incurring a 10% penalty, known as hardship withdrawals. They can be used for emergency personal expenses exceeding 7.5% of AGI and health insurance premiums while unemployed.
Avoid the penalty by making regular, equal payments based on your life expectancy.
Hardship Withdrawals
IRAs are intended as long-term savings accounts for retirement. To discourage early withdrawals, the IRS imposes a 10% early distribution penalty after age 59 1/2; however, there are exceptions which allow investors to access their money without penalties being assessed against them.
Medical expenses are one of the primary drivers behind penalty-free withdrawals from an IRA. Qualified expenses may include most annual checkups, dentist and optometrist visits, prescriptions and surgeries – however the maximum penalty-free withdrawal amount from an IRA is 7.5% of your adjusted gross income (AGI), which refers to your total taxable income minus deductions taken out.
Home purchase and first-time homebuyer exceptions allow penalty-free withdrawals when purchasing or renovating a house up to $10,000. That amount can then be used either towards paying for a new or previous home.
Qualified Medical Expenses
If you have amassed significant medical bills, the IRS permits penalty-free distributions from your IRA in order to cover them. The maximum distribution allowed cannot exceed 7.5% of your adjusted gross income (AGI), which includes deductions such as student loan interest paid during the year.
Unemployed workers may withdraw money from their IRAs without incurring the 10% penalty to cover health insurance premiums, provided they received unemployment compensation payments for at least 12 weeks in the year they made a withdrawal. This exception also applies to people affected by federally declared disasters who need funds to rebuild homes or replace personal property.
Uncollected taxes owed to the IRS can be paid with funds from your IRA without penalty if you are the beneficiary and choose a substantially equal periodic payment distribution schedule, lasting five years or until age 59.5 (whichever comes first).
Unemployment Compensation
Taken before age 59 1/2, withdrawing money from an IRA will usually incur a 10% penalty tax — with some exceptions such as withdrawing for unreimbursed medical expenses that exceed 7.5% of adjusted gross income; paying health insurance premiums during unemployed unemployment periods; or withdrawing via substantially equal periodic payments (SEP).
Roth IRAs offer more flexibility when it comes to withdrawing contributions tax- and penalty-free, although earnings must remain in your Roth account for five years before you can withdraw it without tax or penalty.
Roth IRAs allow for penalty-free withdrawals of up to $10,000 (lifetime limit), for use towards buying your first home. You may also withdraw up to $5,000 after giving birth or adopting a child, and first-time homebuyers, terminally ill individuals and military personnel called to active duty are all eligible to withdraw funds without incurring penalties.
Permanent Disability
Under an early withdrawal penalty exemption, individuals deemed permanently and totally disabled by either an insurance company or Social Security can take penalty-free distributions from their IRA accounts. To qualify, a doctor’s statement that confirms permanent physical or mental disability must accompany such withdrawals from an IRA account.
Individuals withdrawing funds from their IRAs to cover health insurance premiums while unemployed can also qualify for this exemption, and are exempt from incurring the 10% penalty. Rothstein recommends sending your withdrawal directly to your insurer or creating a dedicated bank account solely dedicated to premium payment.
Inherited IRAs do not incur the 10% early withdrawal penalty if their distributions are rolled over into a non-inherited IRA account of your own. Other exceptions to the early withdrawal penalty may include higher education expenses, first home purchases, adoption expenses or uninsured medical costs.
Comments are closed here.