When Can You Withdraw Money From Your IRA Without Paying the 10% Penalty?
Your retirement savings could provide the means for unexpected expenses, but withdrawing those funds incurs an additional 10% penalty in addition to income taxes. There are, however, certain circumstances under which IRA account owners can withdraw without the penalty being assessed.
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1. You’re 59 12 or older
People have saved for retirement using tax-advantaged accounts like IRAs and 401(k) plans, which offer significant tax breaks; if you withdraw any of this money before turning 59 1/2, however, an early withdrawal penalty of 10% must be paid in addition to income taxes that you owe; additionally, this means less money will be available for use during retirement.
There are certain circumstances that allow for you to make withdrawals from your IRA without incurring the 10% penalty, including: -Paying medical insurance premiums should you lose your job; paying qualified education expenses for yourself, spouse and/or children; or purchasing your first home.
When taking money out without incurring penalties based on disability, documentation will be needed. Finally, inheritors can withdraw funds without penalty provided their required minimum distribution is taken within a specified window each year; this amount will be calculated using your life expectancy and an IRS table.
2. You’re disabled
When withdrawing money from an IRA as a disabled individual, withdrawals don’t incur the 10% early withdrawal penalty. To qualify for this exception, you must show that your disability prevents you from engaging in any substantial gainful activity, defined by the IRS as work that would likely earn income. A doctor’s statement is necessary since financial institutions don’t usually make this determination for you – when sending Form 1099-R reports for distributions made during that year it might check Box 7 instead of Box 1 to indicate this fact.
Disability exception is just one of a variety of early distribution penalty exemptions that apply to all retirement savings plans, including IRAs, 401(k), SEP/SIMPLE/ROTH IRAs. Other examples may include using your funds in your IRA to cover unreimbursed medical expenses exceeding 10% of adjusted gross income; qualifying education costs; satisfying an IRS levie or buying your first home.
3. You’re buying a home
Though an IRA is intended for retirement savings, the government allows you to withdraw funds without penalty for certain uses – including first-time homebuying: you may withdraw up to $10,000 from both traditional and Roth IRAs for purchasing either your first house (or that of your spouse) but will have to pay income tax on this amount withdrawn from either account.
Additionally, traditional and Roth IRAs allow you to withdraw up to $10,000 tax-free for qualifying higher education expenses for children or grandchildren. Should Uncle Sam levie your IRA, penalty-free withdrawals can also be made to cover unreimbursed medical costs.
But generally speaking, experts advise putting away money into an IRA for long-term savings and only withdraw funds in exceptional cases. Remember that an IRA does have certain protections against creditors but state laws may vary on this front.
4. You’re buying a car
Withdrawals from your IRA are usually taxed as regular income tax; however, there is one exception that may save money: first time homebuyers may withdraw up to $10,000 without incurring the 10% penalty if used towards closing on their new house and returned within 60 days.
Medical expenses that exceed 10% of your adjusted gross income are an exception to the penalty rule, while your IRA can also be used to purchase transportation if it becomes necessary.
Rather, consult with a Certified Financial Planner professional or financial planner before taking action to withdraw funds from your IRA due to an emergency situation. Withdrawals could affect protections afforded your IRA under bankruptcy laws in your state; thus it should only be done as an absolute last resort.