When Can You Withdraw Money From Your IRA Without Paying a 10% Penalty?
Traditional IRAs are intended to be used beyond retirement age, so early withdrawal can incur penalties and taxes. A financial advisor can assist with withdrawing money as well as find out whether any exceptions apply in your case.
There are certain instances when withdrawing money from an IRA without incurring the 10% penalty, including: 1. Unreimbursed medical expenses 2. Higher education costs 3. Military service.
1. You’re a first-time homebuyer
Your contributions to your 401(k) may be withdrawn without incurring any penalties; however, investment profits usually can only be withdrawn upon reaching age 59 1/2 and before withdrawing money from traditional or Roth IRA accounts can incur an early withdrawal penalty; exceptions exist though for early withdrawal penalties:
Your first home purchase does not incur a penalty when using any amount up to $10,000 as qualifying acquisition costs, including settlement, financing and closing expenses. According to the IRS definition of a “first-time” buyer: either yourself, your spouse or child who have not owned property before.
2. You’re paying for qualified education expenses
Individual retirement accounts (IRAs) are designed to provide money in your golden years, but can also be used for unexpected expenses. While withdrawals prior to age 59 1/2 usually incur a 10% penalty tax rate, in certain situations you can access your savings without incurring additional tax liabilities.
Qualified education expenses include tuition and fees, room and board costs and any necessary course materials. You may only use these funds once in your lifetime to pay for them.
Be wary, however, when considering taking an early distribution: this may help avoid significant financial consequences; but be wary if this decision makes sense for you as any funds not reinvested will never return into your account. Your trusted tax professional will help determine if an early distribution is suitable for you.
3. You’re a qualified reservist
A provision of the HEART Act permits members of the National Guard or Reserve units called up for active duty to withdraw funds from retirement accounts without incurring a 10% penalty, including individual retirement annuities (IRA), employer-sponsored 401(k)s or 403(b) accounts, and individual 401(k).
Qualified reservists may use distributions from these accounts to cover uninsured medical expenses exceeding 7.5% of their income or college tuition, fees, room and board. Repayment can take place up to two years post active duty period completion.
Withdrawing money from your retirement account before age 59 1/2 typically results in steep penalties; however, there may be exceptions that make early withdrawal worthwhile depending on your unique circumstances.
4. You’re dying or disabled
Though the 10% penalty exists to discourage savers from accessing their retirement accounts too early, there may be exceptions. With help from your Thrivent financial advisor, you can navigate these rules and determine what best fits for your situation.
By law, those turning 70 1/2 must begin taking withdrawals known as Required Minimum Distributions (RMDs). Failing to do so could incur an additional tax penalty; exceptions could include qualified reservists called to active duty and those with certain disabilities.
Your IRA allows you to withdraw money without a 10% penalty to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income each year, or health insurance premiums when unemployed or permanently disabled.
5. You’re a first-time homebuyer
Your IRA allows you to make tax-free withdrawals of up to $10,000 at any one time for home buying, building or rebuilding expenses – this lifetime limit applies both to you and your spouse if applicable – using only “qualified acquisition costs”, i.e. the costs associated with buying, building or rebuilding a house as well as typical settlement, financing and closing expenses.
Traditional IRAs are tax-deferred savings vehicles. When withdrawing any of your savings from an account, however, income taxes will ultimately become due unless one of the exceptions outlined above applies.
Before withdrawing funds early from your IRA, make sure to carefully consider all your options before taking action. Withdrawals made too early could decrease the amount you have available when it’s time for retirement – therefore be mindful about any withdrawal decisions before deciding to make them.
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