When Can You Withdraw Money From Your IRA Without Paying the 10% Penalty?
When withdrawing money from an IRA prior to turning age 59 1/2, typically an additional 10% penalty will be assessed in addition to income taxes that you owe. There may be certain exceptions though.
Home ownership or terminal illness are just two sources of stress; unreimbursed medical expenses also pose as potential challenges.
1. You must be at least 59 12
General rule dictates that to withdraw money without incurring the 10% penalty from either traditional and Roth IRAs, one must be aged at least 59 1/2. There may be exceptions; please check with your provider.
Medical expenses: Withdraw funds penalty-free from your IRA to cover uninsured medical expenses that exceed 7.5% of your adjusted gross income. Unemployment premiums: Your IRA can help cover unemployment insurance premiums for 12 weeks of unemployment insurance premium payments. Higher education: Make withdrawals without penalty to help cover tuition, fees, books and supplies at accredited postsecondary educational institutions.
Your IRA allows for penalty-free withdrawals under certain conditions, including giving birth or adopting a child, experiencing disability or inheriting an IRA from someone who died. However, these are rare circumstances; before withdrawing funds early from your IRA we strongly advise speaking with a financial professional first.
2. You must be unemployed for at least 12 weeks
Typically, the IRS doesn’t charge a penalty when withdrawing from an IRA to cover eligible expenses such as medical, dental and vision care to diagnose or treat illnesses as well as health insurance premiums while unemployed.
Use an IRA fund to pay for qualifying higher education expenses, such as tuition, fees, books, supplies and equipment necessary for enrollment at a college or university. Withdrawals made to cover room and board costs are free from IRS penalties as long as enrollment at least half-time is maintained.
Other instances that qualify for penalty-free withdrawals from an IRA account include buying your first home (up to $10,000 lifetime limit), terminal illness, birth or adoption and disability. If withdrawing money to help someone else instead of yourself (including family and friends who may require financial support), income taxes and an early withdrawal penalty of 10% apply – these withdrawals could include income taxes as well as an early withdrawal penalty of 10% early withdrawal penalty.
3. You must have unreimbursed medical expenses
Rothstein suggests opening a separate bank account specifically dedicated to your IRA and only using its funds for medical insurance premium payments – this way you won’t go beyond your maximum withdrawal limit of $10k and incur any penalty-free withdrawals from it. This way you won’t exceed this cap and ensure you stay within its rules, suggests Rothstein.
First-time homebuyers may also make use of an IRA withdrawal of up to $10,000 without incurring penalties, in order to cover their down payment, closing costs and taxes associated with purchasing their first home.
Furthermore, your IRA allows you to withdraw funds without incurring a 10% penalty in order to help cover college tuition, fees, books and supplies for yourself, your spouse, children or grandchildren. Although this may impact eligibility for financial aid as the distribution will be considered income. These funds could also be used towards room and board.
4. You must have unpaid federal taxes
In general, IRA withdrawals are taxed as ordinary income; however, there are some exemptions. You can access funds penalty free if purchasing or rebuilding your first home (up to a lifetime limit of $10,000), as well as without incurring the 10% penalty if experiencing domestic abuse.
Your IRA also offers you a tax-free solution to cover qualifying higher education expenses for yourself, your spouse and children (up to a $10,000 lifetime limit). Qualifying expenses include tuition fees, books, supplies and equipment necessary for enrollment at eligible postsecondary education institutions.
Finally, your IRA allows for you to withdraw money penalty-free over five years or until age 59 1/2, whichever comes first. In order to do this effectively you’ll need to use specific IRS methods of calculation in order to take this route.
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