We all know we need to save for retirement, but if you’re in a financial bind, your IRA might be an ideal source of much-needed funds. In general, if you’re under 59½, you’ll have to pay a 10% penalty on the taxable portion of any funds you withdraw, in addition to paying income tax. But if you meet any of these nine exceptions, you won’t owe the 10% early withdrawal penalty.
- Higher education costs. Withdrawals used for tuition, fees, books and required supplies for you, your spouse, children and grandchildren qualify.
- First-time home purchase. Up to $10,000 per person, or $20,000 for a couple, can be withdrawn to help with the purchase of a home. If you haven’t owned a home for at least the two preceding years, that qualifies as a first-time home purchase.
- Medical expenses. If you have medical expenses that exceed 7.5% of your AGI, you can use money from an IRA to pay for those.
- Health insurance. If you’re unemployed and have been collecting unemployment for at least 12 weeks, you can use IRA funds to pay for health insurance.
- If you become physically or mentally disabled and can’t work, early IRA withdrawals won’t be subject to the penalty.
- If the IRA owner passes away before reaching age 59 ½, the beneficiary has three choices: take a lump-sum distribution; withdraw the funds within five years; or roll the inherited IRA into a new IRA account. The ten percent penalty won’t apply in this case.
- If you set up a series of annual payments over your life expectancy, those payments will be exempt from the penalty.
- Military reserve. If you’re a member of the military reserve and you’re called to active duty for more than 179 days, you can take distributions penalty-free.
- IRS levy. Distributions made to satisfy an IRS levy are not subject to the penalty.
Some of these exceptions have additional rules, so if you’re thinking of taking money out of your IRA and think you meet one of these exceptions, please call our office before you do it.