When Can You Withdraw Money From Your IRA Without Incurring the 10% Penalty?

IRAs are popular retirement savings accounts that you can open via brokers and robo-advisors, unlike 401(k). Furthermore, an IRA does not require employer sponsorship in order to open one.

But you could incur a 10% penalty if you withdraw funds from an IRA before age 59 1/2. Here are some situations when this penalty might not apply: 1. You are disabled person

1. You’re Over Age 59-1/2

Typically, withdrawals from an IRA don’t need to occur before reaching age 59 1/2; if they do though, they are considered ordinary income and could incur a 10% penalty (unless an exception applies).

There are certain exceptions to the 10% early withdrawal penalty. One is using it for higher education costs for you, your spouse or dependents; another is covering medical expenses that exceed 10% of adjusted gross income; and thirdly is purchasing your first home.

IRS allows another exception for distributions from your IRA that take the form of “substantially equal periodic payments”, meaning annual distributions that follow one of three approved methods based on your life expectancy or that of both yourself and beneficiary.

2. You’re Taking a Distribution for a Qualified Education Expense

Withdrawals from individual Retirement Accounts (IRAs) are generally subject to income tax regardless of age, with exceptions listed below. With regard to qualified education expenses, both traditional and Roth IRAs may qualify; the amount deemed free from penalty depends on whether its distribution comprises original contributions or earnings.

Qualified education expenses include tuition, fees and related costs incurred by enrollees (whether the IRA owner, their spouse or children) attending an eligible educational institution that participates in federal student aid programs. Recordkeeping is key in fulfilling this exception – speak to your tax professional for further details.

Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income could also qualify as exceptions to the penalty, along with health insurance premiums paid during unemployment. Furthermore, first-time homebuyers can withdraw up to $10,000 without penalty as part of qualifying acquisition costs.

3. You’re Taking a Distribution for a Qualified Medical Expense

When unemployed and receiving unemployment compensation for 12 weeks, the IRS allows you to tap your IRA tax-free to cover health insurance premiums for yourself, your spouse and any dependents – known as qualified medical expenses. According to Brittany Pederson of Georgia’s Own Credit Union in Atlanta “You don’t even need to itemize deductions to qualify.”

If you inherit an IRA and use withdrawals to pay qualified medical expenses, the 10% penalty doesn’t apply – this exception covers Roth IRA accounts as well as traditional, SIMPLE-IRA, and SEP-IRA accounts inherited through inheritance. Regular income tax must still be withheld from distributions from these IRA accounts.

4. You’re Taking a Distribution for a Qualified Home Expense

If you’re still not quite ready to retire but need access to some of your IRA funds, it is essential that you understand when withdrawals may be taken without incurring penalties from the IRS. Withdrawals made prior to age 59 1/2 are usually penalized by this taxation agency, though there may be exceptions available that you could benefit from.

As an IRA owner, you may withdraw up to $10,000 penalty-free from an IRA for the purchase or construction of your first home, unreimbursed medical expenses exceeding 7.5% of adjusted gross income, and military reservist duty lasting more than 179 days can also access their funds without penalty distributions.

5. You’re Taking a Distribution for a Qualified Retirement Expense

You may be eligible to withdraw funds from your IRA without incurring the 10% penalty, in order to cover certain expenses. However, income taxes will still need to be paid on any distributions taken out from it.

Your IRA allows you to withdraw early, without penalty, to help pay for a first home purchase or pay qualified higher education expenses for yourself, your spouse, or children.

Before tapping your retirement savings for any of these expenses, consult with a reliable tax professional first. They can assist with determining if federal income tax withholding on online withdrawals will be sufficient to avoid penalties as well as estimate how much in additional taxes you might owe.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

Categorised in: