Having an IRA savings in place is a great way to prepare for retirement. However, sometimes situations may arise in which you will need to withdraw your funds before you’ve reached retirement age. Typically, if you take money from your individual retirement account prior to age 59 ½, you’ll be subject to a 10% early withdrawal penalty. This penalty is an additional tax applied to the withdrawal along with normal income tax rates. For example, a $10,000 withdrawal for a taxpayer in the 25% tax bracket would net around $3,500 in taxes. However, certain circumstances exists which can help you avoid the penalty all together.
Withdraw after the age limit
Once you turn 59 ½, you are able to freely withdraw any amount without having to pay a penalty. However, you will be subject to regular income tax for each withdrawal you take. You’re not required to receive distributions from an IRA until you are over 70 ½.
College Costs
If you use the funds to pay for higher education expenses for either you, your spouse, or your children or grandchildren. Additionally, paying for books, tuition, fees and other supplies with money from an IRA will qualify for the exemption of the penalty. If the student is enrolled at least half-time, you can also use the money for room and board at any qualifying university, college, and vocational schools, as long as the school is eligible for federal aid. It’s important to note that the distribution will be added to your taxable income, which can affect financial aid eligibility.
First Home Purchase
You’re eligible to withdraw up to $10,000 ($20,000 for married couples) without penalty in order to buy or build your first home, or that of your child, grandchild, or parent. You’re considered a first time homeowner for penalty-free purposes as long as neither you nor your spouse owned a home during the two years prior to the home purchase. You have 120 days after you take the withdrawal to finish the purchase or construction of your home to avoid the 10 percent penalty.
Medical Expenses
If you have medical expenses that are in excess of 10 percent of your adjusted gross income, you can use money from your IRA without incurring a penalty, as long as the distribution occurs in the same year as the expenses.
Health Insurance
IRA distributions can be taken without penalty if you need to pay for health insurance for your family (spouse, yourself and dependents) if you are unemployed. In order to avoid the penalty, you must be receiving unemployment compensation for at least 12 consecutive weeks. There is a time limit for when you can take the distribution, as you must receive it in the same year you were paid unemployment, and it cannot be received more than 60 days after you are re-employed.
Disability
An exemption is put in place for anyone who receives a distribution due to disability. If you cannot work because of your physical or mental condition, you will qualify for the exemption, and therefore not receive a penalty.
Inheritance
You can leave your IRA funds to a beneficiary or an estate should you become deceased prior to age 59 ½ without penalty.
Annuity
You’re able to initiate annuity payments from your IRA without penalty, as long as you submit to an IRS approved method of distribution and receive at minimum one distribution annually. The payments are determined based on your life expectancy of you and your beneficiaries, and the calculation can be complex. It’s advised to seek help from a qualified professional.
Military Service
Members of the military, including the Army Reserve, Naval Reserve, Marine Corps Reserve, and Air National Guard, called to serve after September 11, 2001 for more than 179 days can receive IRA distributions without penalty, as long as it’s taken during active duty.
Roth IRA
A five year old Roth IRA savings can be beneficial to taxpayers wishing to withdraw money. You’re able to receive the amount of your contributions, though not the earnings, without being subject to an early withdrawal penalty.
401(k)
Leaving your money in 401(k) means that once you turn 55 you are able to withdraw money for any reason without incurring a penalty. This is a major difference between an IRA and a 401(k). If you roll the money into an IRA, you’ll have to wait until you reach 59 ½ before you can withdraw the money penalty free.
