What Can You Withdraw From an IRA Without Penalty?
Withdrawals from an IRA depend on several factors, including your age and account type (Traditional or Roth). Most people must start taking minimum distributions (RMDs) starting in the year they turn 73; these distributions are known as required minimum distributions (RMD).
Typically, withdrawing money from an IRA before retirement incurs taxes and a 10% penalty; however, there may be exceptions.
First-time homebuyer exception
Typically, early withdrawals from an IRA before age 59 1/2 incur a 10% penalty from the IRS; however there are certain exceptions to this rule; one such exception is known as the first-time homebuyer exception which allows up to $10,000 of your IRA funds without penalty to purchase or build your first home within 120 days after distribution and meet IRS definition of first-time homebuyer.
Retirement savings plan regulations permit withdrawal of funds without penalty for higher education expenses for yourself or immediate family members, and when subject to an IRS levy process. Levy processes usually last at least six months and usually result in an IRS tax bill equaling up to 30% of your IRA balance; depending on individual circumstances, payments may need to be spread out over an equal number of periods in some instances.
Unreimbursed medical expenses
Medical or funeral expenses not covered by insurance qualify for penalty-free withdrawals from an IRA, with the money used toward paying them within one year of withdrawing it.
As a first-time homebuyer, you are eligible to withdraw up to $10,000 (lifetime limit) penalty-free from your IRA for purchasing a house. The same rule applies for spouses.
Your IRA allows you to withdraw funds without penalty for qualifying higher education expenses for yourself, your spouse and children, such as tuition, fees, books and equipment required for enrollment. Your IRA also can be used to cover health insurance premiums after losing your job if paid within the same year of unemployment compensation or within one year thereafter; victims of federally declared disasters can access up to $22,000 of funds without penalties provided they meet IRS qualifications.
Unemployed for at least 12 weeks
If you are unemployed for at least 12 weeks, withdrawing funds from your IRA without incurring the 10% penalty is permissible without incurring the minimum withdrawal requirement of $60 days after returning to work.
Traditional IRAs and employer plans have different rules regarding hardship withdrawals; so be sure to speak to your plan administrator before making your decision. Please remember that any earnings on withdrawal may incur income taxes as well as the 10% penalty fee if under age 59.5.
Adopting or having a baby allows you to withdraw funds without penalty without incurring penalties, though the law caps how much can be spent per child at $5,000. Document your expenses to show they were necessary and repay any withdrawals within two years.
Death or disability
Saving for retirement should provide income in later years; withdrawing before age 59 1/2 typically comes with a significant financial penalty. But there may be situations in which individuals can withdraw without incurring the 10% early withdrawal penalty.
First-time homebuyers are eligible for penalty-free distributions when purchasing their residence within two years and without owning one in that timeframe. Furthermore, this money may also be used for education expenses exceeding 7.5% of annual adjusted gross income or medical costs that surpass 7.5% of AGI.
Consider also substantially equal periodic payments (SEPPs). This form of distribution occurs over five years and uses one of three safe-harbor methods to calculate withdrawal amounts; each produces its own annual withdrawal obligation amount, though any adjustments after initial calculation could incur penalties on your tax liability.
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