Early IRA Withdrawals

Early withdrawals

Traditional and Roth IRA are due a 10% penalty if you take them ahead of time, but there are exceptions for early withdrawal that let you skip the fine.

In retirement when you look for a tax-advantageous way to save on retirement, an IRA can fit the bill. Typical IRAs offer an upfront tax break. As long as you meet the income eligibility, you can deduct your contributions for the year you make them. In retirement, however, you will pay income tax at your contemporary tax rate for any withdrawals. In most situations, if you think you’re going to retire in a higher tax bracket, a Roth IRA is a better choice. Roth IRAs involve contributions that are made with money that has already been taxed. This means that there are no tax savings when contributions are made to the account. However, any withdrawals taken out of the Roth IRA after age 59 1/2 are tax and penalty free, as long as it has been at least 5 years since the first contribution to the account. As an additional bonus: you can withdraw your contributions- without tax or penalty -whenever you want.

In order for you to keep your retirement savings safe, the Internal Revenue Service (IRS) imposes a 10% fee on early IRA withdrawals. In certain cases, though, you may be able to avoid the fine. Here are times when you can withdraw early without being penalized from a traditional or Roth IRA.


Unreimbursed Medical Expenses

If you have any out-of-pocket medical bills that are not covered by insurance, or you don’t have health insurance, you may be able to take distributions from you IRA with no penalties in order to cover these expenses.

In order to qualify, the medical expenses must be paid during the same calendar year as your withdrawal. Additionally, the unreimbursed medical expenses must be greater than 10% of your AGI (Adjusted Gross Income).

For example, if your AGI is $100,000 and you have $15,000 in unreimbursed medical expenses, you can distribute up to $5,000 without any penalty — the difference between $15,000 and 10 percent of your AGI ($10,000).


Unemployed and Pay your Health Insurance Premiums

If you are unemployed, you can pay for you health insurance premiums from your IRA with penalty-free distributions. To be eligible for the distribution, you have to fulfill these certain requirements: You lost your job; for 12 consecutive weeks you received unemployment compensation; you have taken the distribution for either the years in which you received the unemployment benefit or the next year; you received it within 60 days from returning to work.


Permanent Disability

If you can no longer work due to becoming permanently disabled, the IRS allows withdrawal from your IRA without the 10% penalty. You can utilize this distribution for anything. Be aware that before your plan administrator will sign off on a penalty-free withdrawal, they will require proof of disability.


Paying Higher Education Expenses

If you have to pay for higher education out of pocket, your IRA may be a perfect source of funding. The 10% penalty can be avoided when using the IRA funds to support yourself, your partner, or your child’s eligible educational expenses. Qualified education costs include tuition, fees, books, supplies, and enrollment equipment. Room and board are also covered for students who are at least half-time enrolled.


Inherit an IRA

If you are the beneficiary of an IRA, the 10% early withdrawal penalty does not apply to your withdrawals. In box 7 of the IRS Form 1099-R, which is the form used to report the distribution, your IRA Provider must report your withdrawal for the distribution of death by including code “4.”


Purchase, Build, or Repair a Home

You can withdraw, without penalty for buying, constructing, or rebuilding a home, up to $10,000 (this is a life limit). In order to be able to apply you must be a first time home-buyer, which means you haven’t owned a house in the last two years. If you are married, your spouse can pool in an additional $10,000 from his/her IRA. In fact, if the money follows the first time homebuyer criteria, it can be used to help a child, grandchild, parent or other family members.


The Withdrawal comes from an IRS Levy

If you are in any unpaid federal taxes, the IRS has the ability to compensate this bill from your IRA. If the IRS specifically draws the money for a federal tax debt, the 10% penalty will not apply. However, you cannot avoid the levy by withdrawing the money to pay taxes. This would not be an exception and you would be on the hook for the 10% penalty.


Called to Active Duty

Eligible reservist distributions do not become subject to the 10% penalty. Such allocations are generally directed to the military reservist or National Guard member who is called into active duty for at least 180 days after September 11, 2001.