When withdrawing funds from an IRA prior to reaching age 59 12, usually there will be a 10% penalty applied, though in certain situations you can avoid that charge altogether.
Qualified medical expenses and first-time homebuyer costs may be paid without incurring penalties, and withdrawals taken to cover higher education expenses such as tuition fees, extra charges, books, supplies and equipment can also be done so without incurring penalties.
1. You’re 59 12 or older
Once you reach age 59 1/2, you are eligible to withdraw original contributions made to both traditional and Roth IRAs without incurring the 10% early withdrawal penalty; however, you will still owe income taxes on them.
Once this point is reached, required minimum distributions (RMDs), which are calculated based on your life expectancy, must begin being taken from your IRA. Failing to take RMDs could result in tax penalties.
If you need cash quickly, traditional or Roth IRA withdrawals can provide penalty-free funds for first-time home purchases (up to $10,000) made before age 59 1/2. Also eligible are withdrawals to cover unreimbursed medical expenses for qualified retirees or dependents of such retirees (but this rule varies). Before making early withdrawals consult a financial professional as each year you must reestablish eligibility – otherwise it will disappear forever! Additionally for those collecting unemployment compensation who need health coverage until new employment opportunities come along they could use an IRA as health coverage until finding employment opportunities become available – helping keep health coverage until then!
2. You’re a first-time homebuyer
Though financial experts do not advise making early withdrawals from an IRA, some situations may necessitate such withdrawals. Before withdrawing money from your IRA account, however, consider other sources as possible funding solutions first.
Based on your circumstances, penalty-free distributions from your Traditional or Roth IRA could help cover some housing expenses. For example, these funds could help fund your first home, or purchase one for someone who meets IRS guidelines of being an “first time homebuyer.”
Penalty-free distributions may also be made to cover medical bills that exceed 10 percent of your adjusted gross income, provided they were incurred either within the year you received unemployment compensation, or the following year and before being reemployed. Furthermore, disabled individuals can withdraw penalty-free IRA funds provided they provide proof of disability (see IRS Publication 590 for details). Beneficiaries of deceased owners can also make penalty-free withdrawals.
3. You’re a qualified medical expense
If you need money from your IRA for unreimbursed medical expenses, withdrawals of up to $5,000 without penalty may be made without incurring a tax penalty. This applies to costs such as deductibles, copays and prescription drugs as well as premiums while you’re unemployed.
Traditional IRA withdrawals can also help you buy your first home without incurring the 10% penalty, provided they consist solely of earnings rather than contributions made originally.
As an IRA owner or plan participant, at age 70 12 the government requires you to begin taking required minimum distributions (RMDs). Any withdrawals not classified as RMDs may incur income taxes and the 10% penalty; even withdrawals made prior to age 59.5 could incur taxes and penalty. RMDs serve a purpose – stopping people from keeping their money tax-deferred indefinitely.
4. You’re unemployed
Individual Retirement Accounts (IRAs) are designed to help individuals save for retirement. Money that goes into an IRA is saved pre-tax and earnings are tax deferred until you withdraw it; however, early withdrawal penalties are imposed by the Internal Revenue Service unless they fall under one of their exception categories.
For example, withdrawing funds from your traditional IRA for medical expenses that exceed 7.5% of your adjusted gross income can help avoid penalties; provided the expenses were incurred within one year of taking out the distribution.
Withdrawals from Roth IRAs funded with after-tax contributions may also be made without incurring penalties under similar conditions. And if you become unemployed and require funds from an SEP IRA – designed specifically to meet the retirement needs of small businesses or self-employed individuals – as long as costs related to making withdrawals are covered within one year, penalties won’t apply either.
