When Can You Withdraw Money From Your IRA Without Paying the 10% Penalty?
When withdrawing funds from an IRA before age 59.5, the IRS typically applies an additional 10% penalty on top of whatever taxes may be owed; there are however exceptions.
Your IRA can help pay for qualified higher education expenses such as tuition fees and books – room and board expenses are also covered.
First-time homebuyer
However, there are two instances when withdrawals from an IRA don’t incur the 10% penalty: when purchasing a home and providing funds for its birth or adoption. These exceptions can only be utilized once every lifetime.
An additional exception allows funds from an IRA to be used for unpaid federal taxes; otherwise, the IRS could levy it and apply a 10% penalty penalty against your IRA funds. Furthermore, qualified reservists called to active duty for more than 180 days or indefinitely can make early withdrawals without paying taxes or penalties on early withdrawals from their IRAs.
Disability
Being disabled can be an upsetting reality, but it doesn’t need to spell the end of your retirement savings. According to IRS regulations, individuals unable to work may withdraw funds penalty-free from their IRA accounts through what’s known as substantially equal periodic payment (SEPP). Distribution amounts for SEPP distributions are calculated using an IRS formula based on expected life expectancies.
The IRS also allows exceptions to its 10% penalty, such as withdrawals to cover medical costs, financial emergencies, first-time home purchases and qualified education expenses. You can also make distributions without incurring this charge if you are totally and permanently disabled, beneficiary to an account whose owner has passed away, or victim of a federally declared disaster.
Education expenses
The IRS allows you to withdraw money from your retirement account to cover tuition and qualified education expenses for yourself, your spouse or children without incurring penalties, provided certain rules are observed. Qualified education expenses include tuition fees, books, supplies and equipment required for enrollment as well as room and board; students must also be attending at least half-time at an eligible educational institution which includes most public, private and nonprofit colleges/universities as well as vocational schools that participate in student aid programs administered by the U.S. Department of Education.
An important rule to keep in mind when taking advantage of this exception is using distributions from an IRA rather than work-related plans such as 401(k). For instance, the tax court recently disallowed an attempt by a father who took out funds from his Federal Thrift Savings Plan to cover his son’s tuition bill because the exception does not apply to non-IRA distributions.
Birth or adoption of a child
Birth or adoption can provide an acceptable reason for withdrawing money from an IRA without incurring the 10% penalty, however this withdrawal must occur post-child’s birth/adoption, rather than before it.
Your IRA assets can be used to pay for higher education expenses for you, your spouse or children – such as tuition fees, books and equipment necessary for enrollment – including room and board for dependent students.
Your IRA can also help cover medical expenses such as annual checkups and prescriptions; however, elective procedures like cosmetic surgeries do not qualify as qualified expenses. In the event of death, funds from an IRA can also be withdrawn without incurring the 10% early withdrawal penalty.
Health insurance premiums
There are certain exceptions that allow individuals to withdraw money from their IRA without incurring the 10% penalty, such as higher education expenses such as tuition fees, books, supplies and equipment necessary for enrollment in an accredited educational institution. Furthermore, no penalty applies if withdrawals were used to cover health insurance premiums during an unemployed period of at least 12 weeks and came from traditional IRA.
There are also exceptions, including withdrawals made to purchase, build or rebuild a home and pay unreimbursed medical expenses exceeding 7.5% of adjusted gross income. Furthermore, individuals experiencing disability and/or those receiving “substantially equal periodic payments” (SEPPs) based on life expectancy can withdraw funds without penalty.
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