What Can You Withdraw From an IRA Without Penalty?
Typically, in order to withdraw funds without incurring penalties from an IRA account without incurring fees, you must be aged at least 59 1/2. There may be exceptions.
As part of your first home purchase, withdrawals without penalty are allowed without penalty. Furthermore, they can also be used for certain medical expenses and membership in either the National Guard or Reserves.
First-time homebuyer exception
First-time homebuyer exception to penalty tax allows qualifying individuals to withdraw up to $10,000 from an IRA without incurring a penalty tax, provided it’s used only towards purchasing a home and reported on their tax return within 120 days of withdrawal. You can use these funds towards acquisition costs such as settlement, financing and closing costs that qualify as qualified acquisition costs.
Ordinarily, to withdraw money from an IRA without incurring penalties at age 59 1/2 is typically required. However, there are exceptions provided by the IRS such as their “first-time homebuyer exception”. This allows individuals to withdraw up to $10,000 without incurring the 10% penalty provided they can prove they have never owned or haven’t owned one within two years; this applies both traditional and Roth IRAs alike and cannot be replaced with additional contributions made thereafter.
Unemployment compensation
Unemployment compensation is just one reason you can withdraw funds from your IRA without penalty, while the IRS allows withdrawals up to $10,000 total from IRA funds for qualified acquisition costs associated with buying or building your first home, considered qualified acquisition costs by them. Furthermore, they can also use these funds for medical expenses exceeding 7.5% of their adjusted gross income.
Another excuse for taking penalty-free withdrawals may include paying birth or adoption expenses, and withdrawing funds to cover health insurance premiums while unemployed.
Beneficiaries who inherit an IRA can withdraw funds penalty-free at any time within 10 years; beneficiaries of deceased spouse’s IRA funds may also do so without penalty; however, there are some rules regarding inherited IRAs and the 10% early withdrawal penalty which must be considered carefully before taking action.
Disability
IRAs allow penalty-free withdrawals under certain circumstances, such as purchasing your first home, unreimbursed medical expenses that exceed 10 percent of income or receiving unemployment compensation in any year.
Penalty-free distributions may also be taken upon the birth or adoption of a child, with up to $5,000 being taken without penalty per eligible birth or adoption. You could use this money for college expenses for yourself or family members without incurring penalties.
To qualify for disability exception withdrawal, you need to provide proof from a doctor that your physical or mental impairment prevents you from working permanently and indefinitely. When filing your tax return with the IRS, IRS Form 5329 must also be included with it and when your IRA custodian provides you with a 1099-R enter “code 03 for disability exception”. This will tell them not to charge additional 10 percent tax when making your distributions.
In-kind distributions
There are exceptions to the 10% early withdrawal penalty when withdrawing funds from an IRA, such as withdrawals made for qualified higher education expenses or first-time homebuyer costs. Before withdrawing funds from your IRA, always consult a financial advisor first, taking into account long-term effects and possible long-term costs associated with withdrawals.
IRA withdrawals may also be free from penalties in cases where Uncle Sam levies your account to collect tax debt. Under these circumstances, up to $10,000 of funds may be taken out without penalty.
If you own intangible assets such as real estate, precious metals or fine art that are difficult to sell quickly for cash, withdrawing them in-kind may save money in taxes and transaction expenses. Your Thrivent financial advisor can explain the options available and assist with making this decision if this approach makes sense for your situation.
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