When Can You Withdraw Money From Your IRA Without Paying the 10% Penalty?

When can you withdraw money from your IRA without incurring the 10 penalty to help purchase a home

Withdrawing funds from an Individual Retirement Account (IRA) prior to age 59 1/2 typically incurs a 10% penalty plus income taxes; however, in certain situations you may be exempt from these penalties and withdraw funds without incurring them.

Your IRA allows for withdrawals that exceed 7.5% of your adjusted gross income for unreimbursed medical expenses that exceed 7.5%; other exceptions include first-time home purchases and disability premium payments.

Qualified distributions

Rules regarding IRA withdrawals can be complex and vary depending on your specific situation. For more information, the IRS offers an exhaustive publication on this topic; should any doubt arises it would be wise to contact them or an independent tax adviser directly for advice.

Withdrawals of contributions you made directly into an IRA should generally be tax- and penalty-free; however, earnings withdrawals will typically be taxed as regular income unless an exception applies.

Example: the IRS permits penalty-free withdrawals from an IRA account to cover unreimbursed medical expenses that exceed 10% of adjusted gross income, provided they can be documented and you use this exemption no more than once annually. Another example includes withdrawing funds to purchase your first home – although only if certain requirements have been fulfilled such as not owning one in the last two years (among other restrictions).

Taxes

Typically, IRA withdrawals before age 59 1/2 incur a 10% early withdrawal penalty; however, there may be exceptions.

One is to pay unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, while another option would be using your IRA funds to pay health insurance premiums if you’re out of work and receiving unemployment benefits for more than 12 weeks.

If you are self-employed or own a small business, withdrawing money from an IRA without incurring the penalty can help fund startup costs and operating expenses. The funds can even be used towards purchasing your first home as long as it doesn’t become your primary residence and you take out less than $10,000 total from it.

Inherited IRAs must follow the same regulations as your own account, though beneficiaries should take extra care in how they spend it to avoid taxes and penalties. Beneficiaries can avoid incurring the 10% penalty by opting for “substantially equal periodic payments,” which lock them into taking regular distributions each year for five years or until age 59 1/2, whichever comes later.

Military reservists

Military reservists are part of an all-volunteer force and may be called up in times of war or national emergency. On average, one weekend per month and two weeks annually for training are dedicated to these roles which may take place either stateside or overseas depending on the circumstances.

Reservists’ military status can influence how tax authorities treat withdrawals from retirement accounts. Qualified reservist distributions are exempt from early distribution penalties of 10%, as well as not counting as income in ordinary income taxes or suspending deferrals or reducing contribution limits for income tax purposes.

Reservists may recontribute retirement account distributions within two years after ending active duty, even if their contributions surpass annual contribution limits. Repayment must be reported on IRS Form 8606 but do not qualify as tax deductions, thus distinguishing reservists from regular and retired service members, who do not enjoy this privilege.

Hardship distributions

Situation-dependent, you may be eligible to withdraw money from your IRA without incurring a penalty, provided it was motivated by hardship. The IRS permits these distributions for various reasons such as unreimbursed medical costs or buying your first home – though expenses must have occurred in the same year as withdrawal.

Though a hardship withdrawal does reduce retirement savings, it could be worthwhile if you are facing an unexpected financial emergency. If there are other resources such as an emergency fund that are more suitable, those should be used before tapping your IRA account for withdrawals.

To qualify for a withdrawal, it is important to show proof of need and amount needed, complete an IRS self-certification form and wait six months after taking out money from an IRA deferrals are suspended as this withdrawal counts as income and could alter eligibility for student aid.


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