Can I Cash Out My IRA Before I Turn 59 1/2?
As Individual Retirement Accounts (IRAs) are intended for retirement savings, early withdrawals may incur taxes and penalties; however, there may be exceptions.
One is designed for first-time homebuyers, another enables payment of health insurance premiums while unemployed and the third lets you withdraw penalty-free medical expenses incurred while disabled. Here you can learn more about each situation’s rules.
How Much Can I Withdraw?
IRA rules allow for penalty-free withdrawals in certain instances. For instance, withdrawing money early without incurring an early withdrawal penalty to cover unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI) can qualify. Furthermore, withdrawals can also be taken out to purchase primary residence after reaching age 59 1/2.
Your IRA allows you to take out installments that provide steady income throughout your retirement years, known as substantial equal periodic payments (SEPPs), on an IRS-approved schedule over five years or until age 59 1/2, whichever comes first.
If you own a traditional, SEP or SIMPLE IRA, RMDs must begin being taken by April 1 of the year following your 73rd birthday. RMDs will generally be taxed as ordinary income if taken before 59.5.
Taxes
Most IRAs are funded with pre-tax money, and distributions from them are taxed at your nominal income tax rate. Additionally, the IRS charges an early withdrawal penalty of 10% if funds are taken out prior to age 59 1/2.
Avoiding penalties by taking series of carefully calculated withdrawals known as substantially equal periodic payments (SEPPs). The IRS provides several acceptable calculation methods based on your age and life expectancy to help determine how much can be withdrawn without incurring penalties each year.
Other exceptions to the penalty may include using your IRA funds for medical expenses exceeding 7.5% of adjusted gross income, purchasing or building a home, and covering unemployment insurance premiums should you become unemployed from work. Withdrawals used for these purposes must be used within 120 days to avoid incurring the penalty; to claim this exception on Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts filed along with your 1040 return.
Hardship Withdrawals
If your medical expenses were not covered by insurance, or education-related costs for you or a member of your household aren’t covered by tuition insurance, withdrawals from an IRA without penalty could help offset those costs. These expenses include tuition fees and extra charges associated with tuition; books; supplies & equipment required for enrollment as well as room & board costs (provided the student enrolled at least half-time).
An IRA may also be used to cover disability payments without incurring an early withdrawal penalty of 10%; however, you’ll require documentation from your source of income showing that you are completely unable to work and thus eligible.
These hardship withdrawals do not qualify for rollover and will be taxed in the year they’re taken out. When making these withdrawals, you will be asked how much federal taxes to withhold from each withdrawal (you can change this number annually), plus any applicable state taxes as well.
60-Day Rollover
The 60-day rollover rule permits you to temporarily withdraw funds from your IRA and redeposit them without incurring income tax or penalties, provided all requirements have been fulfilled. When taking advantage of this strategy it’s advisable to discuss it with a financial advisor first to make sure your compliance.
The IRA rollover rules stipulate that you can only complete one IRA rollover each year. If you go beyond this threshold, any distribution is taxable and subject to a 10% penalty if you’re under age 59 1/2.
Direct trustee-to-trustee transfers can help avoid the 60-day rule by being completed without custodian involvement or need for written rollover requests. It should be noted, however, that an IRS ruling considers these types of transfers rollovers and thus still count towards satisfying the 60-day requirement – possibly leading to 1-year postponements before further rollovers can occur – making written rollover requests the preferred approach.
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