What Can I Withdraw From My IRA Without Penalty?
If you are over age 59 1/2, withdrawing funds from an IRA without incurring penalties is possible without incurring penalties; just make sure you consult a tax expert beforehand.
The Internal Revenue Service requires you to take minimum distributions from your IRA annually based on factors like your age, life expectancy and year-end account balance.
1. You can withdraw up to $10,000 for a first-time home purchase
Withdrawals from an IRA vary depending on your age and account type. Withdrawing funds before reaching age 59 1/2 usually triggers income taxes as well as a 10% early withdrawal penalty.
First-time home buyers are eligible for penalty-free withdrawals of up to $10,000 from all types of IRAs (traditional, rollover and SEP). Couples purchasing homes together qualify for up to $20,000 of withdrawals without penalty fees being assessed against either of them.
As well as homebuyer exception, distributions from an IRA may also be withdrawn without penalty if you’re a college student or the beneficiary of a deceased IRA owner. Other exceptions include unreimbursed medical expenses and buying primary residence (see IRS website for the complete list of exceptions).
2. You can withdraw up to $5,000 for tuition expenses
As a student, withdrawals from your IRA can be used to cover tuition expenses without incurring the 10% early withdrawal penalty. It’s important to keep in mind that these withdrawals will be reported on your tax return and may affect eligibility for financial aid as they’ll count as income when calculating Free Application for Federal Student Aid (FAFSA) and school-based assistance applications.
To avoid penalties, the amount withdrawn must be used to cover qualifying education expenses within the same year of taking distribution. These may include tuition fees, books, educational supplies and equipment purchases and room and board payments; in addition, funds could also be used to cover these expenses for yourself or for someone else such as spouse, children or grandchildren.
3. You can withdraw up to $5,000 for medical expenses
Your IRA allows you to withdraw without penalty to cover medical expenses that exceed 7.5% of your adjusted gross income or assist in covering health insurance costs for yourself, your spouse and dependents when unemployed. In certain instances, distributions from an IRA could also cover adoption or birth expenses for an eligible child.
If you own or manage a small business, using your IRA funds for purchases of equipment and supplies won’t incur penalties; however, any withdrawals still need to pay income taxes upon withdrawal; withdrawal rules vary by age and account type – typically, anyone aged 59 1/2 or under faces a 10% withdrawal penalty for both traditional and Roth IRAs; there may be exceptions however.
4. You can withdraw up to $5,000 for adoption expenses
As well as qualifying for penalty-free withdrawals, IRA holders aged 59 1/2 to 72 can take distributions in what are known as “substantially equal periodic payments.” The IRS offers tables that show how much of an amount should be withdrawn each year depending on your life expectancy.
Though these withdrawals avoid incurring the 10% early withdrawal penalty, they still count as taxable income in the year of withdrawal. For instance, Jim and Sarah withdrawing $5,000 from their retirement accounts to cover medical expenses may push them into higher tax brackets in 2022; an experienced tax professional can help calculate federal and state taxes accordingly; alternatively, you can visit IRS’ online calculator for this. Qualified medical expenses usually include routine checksups, prescriptions and some surgeries as examples of qualifying medical costs.
5. You can withdraw up to $5,000 for unreimbursed medical expenses
The IRS allows for you to withdraw money from your IRA without penalty in certain situations, generally regarding medical bills. More specifically, you are permitted to distribute from your IRA in cases of unreimbursed deductible medical expenses exceeding 10 percent of adjusted gross income – this typically covers annual checkups and prescription costs while not elective procedures that you don’t necessarily require.
If you lose your job and receive unemployment compensation for 12 weeks or more, distributions from your IRA may not incur the 10% early withdrawal penalty. In order to take advantage of this exception, however, employment must have resumed within 60 days in order for you to qualify. It may be riskier than other means but your tax professional can assist in calculating how much to withdraw and any taxes due.
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