When Can You Withdraw Money From Your IRA Without Paying the 10% Penalty?
When withdrawing funds from an IRA before age 59 1/2, usually there will be a 10% penalty attached. There may be exceptions that allow you to bypass this penalty though.
Distributions from both traditional and Roth IRAs are taxed as income when taken out, however if they’re used for qualifying expenses (like unreimbursed medical bills, first-time homebuyer costs and higher education tuition, fees, books and supplies) this penalty can be waived.
1. You’re a reservist
Use of retirement savings for everyday expenses may trigger a penalty; however, there are certain exemptions such as using an IRA withdrawal for qualified education expenses such as tuition fees, room and board costs.
Investors who become unemployed can also withdraw funds without incurring penalties from their IRA, while there are special rules regarding inherited IRAs.
Withdrawals from individual retirement accounts (IRAs and employer-sponsored retirement accounts, in general) are taxed as income; however, in certain situations you may be eligible to take early distributions without incurring the 10% early distribution penalty. If you need advice specific to your circumstances or have questions regarding early distributions from an IRA or employer-sponsored retirement account, consult an expert tax advisor using our advisor locator; once found you can schedule a time with them online or visit one of Fidelity Investor Centers near you.
2. You’re a first-time homebuyer
If you withdraw money from an IRA to help purchase or build your first home, you can do so without incurring the 10% penalty. This applies both traditional and Roth IRAs; however there may be certain conditions.
This exception also extends to first-time homebuyers in your family, such as your children or grandchildren. According to the IRS definition of a first-time buyer, that is someone who has never owned an interest in a home for at least two years prior.
Other withdrawal exceptions may apply, such as paying unreimbursed medical expenses that exceed 7.5% of your adjusted gross income and assisting with birth or adoption expenses incurred within the year the distribution was made; and receiving earned income to qualify.
3. You’re a first-time homebuyer with a spouse
Slott notes that withdrawals from an IRA without incurring penalties may be used to cover unreimbursed medical expenses that exceed 7.5% of your income; this does not apply to expenses charged directly on credit cards, however.
2020 brings new freedoms for IRA owners who wish to pay the costs associated with giving birth or adopting. Distributions without penalty can now be taken out to cover these expenses – provided they meet basic living needs.
Heirs who inherit an IRA can withdraw funds without penalty to cover health insurance premiums for themselves, spouses and dependents in either the year of death or in subsequent years. Unfortunately this exception doesn’t apply to Roth IRAs but applies equally well for traditional ones.
4. You’re a first-time homebuyer without a spouse
Typically, the 10% penalty applies to any withdrawals or distributions you make before age 59 1/2 from an individual retirement account. However, under certain conditions you can withdraw money without incurring this tax penalty.
First-time homebuyers can withdraw up to $10,000 without penalty in order to help with a down payment on a new house – making this an excellent solution for those struggling to save enough for an initial deposit.
Your IRA allows you to withdraw money without penalty to cover college expenses for yourself, your spouse, children or grandchildren. This money could cover tuition fees, books and room and board costs – just remember to keep records so you can claim them on your tax return!
5. You’re a first-time homebuyer with a spouse who dies
As a rule, savers face a 10% early withdrawal penalty from their IRA before reaching age 59 1/2. But there may be exceptions.
As an example, withdrawals from an IRA without penalty can be used to cover unreimbursed medical expenses that exceed 7.5% of adjusted gross income in any given year, and for child birth or adoption expenses without incurring penalties.
You may also avoid penalties if you or your spouse are suffering from total and permanent disability. To qualify, provide medical documentation indicating your disability will likely lead to death or long-term ongoing effects; then withdraw proceeds from an IRA with this designation into another Fidelity account with similar Social Security Number as your originating IRA, or into bank account via our Electronic Funds Transfer service, available for all IRA accounts.
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