What Can You Withdraw From an IRA Without Penalty?
Between 59 1/2 and 72, you can withdraw funds from an IRA without incurring a penalty, though certain restrictions apply.
One exception allows you to withdraw tax-free withdrawals from an IRA to cover unreimbursed medical expenses that exceed 10% of your adjusted gross income.
1. You can withdraw your contributions
If you own an IRA, contributions can be withdrawn without penalty at any time; however, any distributions prior to age 59 1/2 or held less than five years may incur income taxes.
The IRS permits penalty-free withdrawals from an IRA to cover unreimbursed deductible medical expenses that exceed 10 percent of adjusted gross income, or to cover health insurance premiums while unemployed for 12 weeks or disabled completely or partially.
As a first-time homebuyer, you may withdraw contributions and earnings tax-free in order to cover purchase costs. Parents using their IRAs for child birth or adoption costs may similarly withdraw money at no penalty from their accounts if required. When withdrawing funds from accounts held with financial institutions such as an IRA or savings account, withdraw it through direct request of withdrawal from said institutions.
2. You can withdraw your earnings
An IRA’s earnings can grow tax-deferred, and you can withdraw them without penalty – however, any withdrawals will be added to your taxable income and include both what was originally invested as well as any gains or losses on those investments.
Traditional, SEP and SIMPLE IRAs allow you to contribute up to 25% of your salary; self-employed workers and small business owners may use a backdoor Roth method instead to save more.
Withdrawals made before age 59.5 are typically subject to taxes and an early withdrawal penalty of 10%; however, there may be exceptions.
As an example, you may withdraw IRA earnings penalty-free if your unreimbursed medical expenses exceed 7.5% of your adjusted gross income. Furthermore, penalty-free distributions can also be taken if you are unemployed and need health insurance premium payments; and when purchasing or building your first home. The IRS website contains an exhaustive list of exemptions to this early withdrawal penalty.
3. You can withdraw your distributions
Though the 10% penalty for withdrawing funds before age 59 1/2 applies only to earnings, not original contributions, in certain situations you can withdraw contribution money without incurring an early withdrawal penalty – for instance paying medical insurance premiums during job loss or purchasing real estate are examples where this rule might not apply.
Distributions from an IRA can also be used to pay for qualified higher education expenses such as tuition, fees, books and supplies. You may even withdraw funds without incurring a penalty in order to cover funeral costs.
Your IRA distributions can also be withdrawn penalty-free to purchase your first home up to a limit of $10,000. In addition, withdrawals without penalties may also be made if you’re suffering from permanent and total disability or are the beneficiary of an IRA account holder who dies, though income taxes must still be paid on these withdrawals.
4. You can withdraw your rollovers
Individuals who rollover their IRA contributions from SEP IRAs, SIMPLE IRAs and some other retirement plans may take penalty-free withdrawals in certain scenarios. According to the IRS, this includes unreimbursed medical expenses exceeding 7.5% of your adjusted gross income each year (you don’t have to itemize deductions to take advantage of this exception); purchasing their first home – up to $10,000 may be taken out without penalty in a lifetime from their pre-tax IRA account;
You will avoid paying the 10% early withdrawal penalty if your funds are withdrawn in response to a divorce court order (QDRO). Otherwise, ordinary income taxes and an early withdrawal penalty of 10% apply. Withdrawals prior to age 59 1/2 are also subject to taxes and the 10% early withdrawal penalty; exceptions could include total and permanent disability, purchasing your first home before age 59 1/2 or paying health insurance while unemployed (prove those criteria to avoid penalties).
Categorised in: Blog