When Can You Withdraw Money From Your IRA Without Paying the 10% Penalty?
Contributions to an IRA are tax deductible and investments grow tax-deferred, however withdrawals prior to retirement age typically trigger taxes as regular income unless an exception applies.
IRS rules allow penalty-free withdrawals from an IRA to purchase your first home and cover educational costs, as well as to help cover health insurance premiums when unemployed.
1. You’re Over Age 59-1/2
Assuming you meet any exceptions listed, generally speaking you can withdraw funds from an IRA without incurring penalties at any age. Withdrawals made prior to age 59 1/2 may incur a 10% tax penalty in addition to regular income tax liability.
Exemptions include medical expenses such as annual checkups, prescriptions and surgery; education expenses for yourself, your spouse or children; and up to $10,000 of costs associated with buying your first home. To avoid penalties when taking substantially equal periodic payments (SEPPs) through an IRS-approved method – annual annuity withdrawals that must last at least five years or until age 59 1/2 (whichever comes first).
One exception occurs upon the death of an IRA owner; their surviving spouse can withdraw up to $10,000 without incurring penalties, though any withdrawal must be paid back within five years.
2. You’re Terminally Ill
If your doctor certifies that you have terminal illness and can expect to pass within 84 months, you are eligible to withdraw money from your IRA without incurring the 10% penalty. Your distribution will still count as income in the year it was taken; however, no penalties will apply and can even be moved over into another retirement account if necessary. A trusted tax professional can run through all the numbers and help fill out forms as needed.
Beneficiaries of IRAs, 401(k), 403(b) plans and government 457(b) plans can now withdraw up to half their vested account balances (or $10,000, whichever is lower) without incurring penalties in cases of domestic abuse and need money for escape from an abusive situation. This provision takes effect this year.
3. You’re Buying a Home
If you’re a first-time homebuyer or are purchasing one for someone else (including children, spouses, grandparents and parents), withdrawals of up to $10,000 without incurring penalties can be used towards “qualified acquisition costs”, which includes purchasing price settlement and financing costs as well as transfer taxes on the home.
Your IRA allows you to withdraw money tax-free if necessary for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for the year, but remember to pay income tax upon distribution.
Before withdrawing from your IRA, consult with a financial professional. They can help determine whether any penalties apply, and explain other solutions available for addressing financial emergencies. SmartAsset’s free tool connects you with up to three vetted advisors serving your locality if that helps find one quickly.
4. You’re Adopting a Child
After an IRA owner or their spouse passes away, no penalties apply to withdrawals made after death from the account. Beneficiaries can access funds inherited in an inherited IRA without incurring penalties.
At times of lower income levels, making withdrawals during low-earning years can help lower tax liabilities and help savers avoid paying as much in taxes. That is why many savers switch over to Roth IRA accounts between 55-65 when their income levels tend to drop off significantly.
Parents can take advantage of the penalty-free IRA withdrawal rule after giving birth or adopting a child, withdrawing up to $5,000 penalty-free from their IRAs or 401(k) accounts to cover associated expenses and receive it all back within one year from when it occurred – so timing must be precise!
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