Anyone earning income can open an IRA at a bank or brokerage firm, using either traditional or Roth IRA to save for retirement by investing in stocks, bonds and exchange-traded funds.
Unintentional theft from retirement savings will incur severe financial consequences, so here’s a breakdown of the rules and exceptions that should be adhered to when accessing them early.
An Individual Retirement Account, or IRA, is meant to help save for retirement; however, the government allows you to withdraw funds at any time as long as certain criteria are met. Withdrawals from both traditional and Roth IRAs may incur income taxes as well as an early withdrawal penalty of 10% for withdrawals before age 59 1/2.
Attempted withdrawal exceptions typically include medical expenses and first-time homebuyer expenses, with up to $10,000 eligible for withdrawal without incurring the 10% penalty. Another exception allows total and permanent disability to avoid the penalty; simply demonstrate this fact through receiving payments from either insurance companies or Social Security.
Required Minimum Distributions, or RMDs, are withdrawals you are legally obliged to begin taking annually from a traditional IRA at age 70 1/2 (recently revised by the Establishing Every Community Up for Retirement Enhancement Act). RMDs are subject to ordinary income tax rates; however, your beneficiaries may be eligible for rollover deductions.
IRA Withdrawal Penalties
Savers may withdraw funds from their IRAs without incurring penalties in financial emergencies if they can demonstrate that it will help cover expenses related to home purchase, higher education and health care. For example, those affected by federally declared disasters such as heavy rainfall that killed 335 people in Hazard, Kentucky can withdraw from an IRA to cover replacement and rebuilding costs; subsequent withdrawals must be returned back into their account within three years otherwise another withdrawal would need to be made from that account.
Withdrawals made prior to age 59 1/2 typically incur income tax and a 10% penalty; however, an exception exists if unreimbursed medical expenses exceed 7.5% of annual adjusted gross income and were incurred and paid during the year of withdrawal. Furthermore, no penalties apply to inherited IRAs.
IRA Withdrawal Exceptions
Owners of Individual Retirement Accounts who are between 59 1/2 and 72 (previously 70 1/2) years old can withdraw funds without penalty provided they qualify under specific exceptions, such as medical expenses, first-time home purchases and qualified education costs.
Qualified educational expenses include tuition, fees, books and supplies as well as room and board for at least half-time students enrolled. IRA account owners can withdraw funds to pay health insurance premiums for themselves, their spouses and children.
First-time home buyers can use IRA funds toward their down payment without incurring a penalty from the IRS, though their withdrawal is limited to $10,000 for any purchase of their principal residence (not just during their first two years of ownership). You may withdraw additional money from your IRA as needed but only for qualifying acquisition costs as defined by the IRS; these include costs related to buying, building or rebuilding the house and associated closing and settlement expenses.
IRA Withdrawal Options
Individual retirement accounts (IRAs) offer people another means of saving for their retirement outside the workplace plan. Investors can invest in stocks, bonds, mutual funds or exchange-traded funds.
The IRS taxes IRA withdrawals, but has several exemptions that allow individuals to withdraw funds without incurring penalties. You can use IRA money for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income or to purchase your first home without penalty. Furthermore, penalty-free distributions may also be taken by those unemployed for at least 12 weeks or permanently disabled and unable to work.
Most individuals should wait to withdraw funds from an IRA until age 59 1/2; otherwise, you’ll face ordinary income tax and an early withdrawal penalty of 10% – this is because Social Security benefits often don’t cover enough expenses during retirement.