An individual retirement account (IRA) is an alternative to traditional employer retirement benefits like a 401(k) that isn’t employer-sponsored. The purpose of an IRA is to provide supplemental income to retirees. After the age of 59.5, individuals can begin withdrawing from their IRAs without penalties but may need to pay income taxes depending on the type of IRA account.

While IRAs are meant to serve as a form of post-retirement income, you can withdraw money before the age of 59.5. Accuplan Benefits Services is here to help you decipher IRA withdrawal rules and penalties.

What Are Early IRA Withdrawal Fees?

Contributions that workers make to their IRA can be withdrawn prematurely. An IRA is intended to supplement income in retirement years, but as the future and some circumstances are often out of our control, individuals sometimes need to make early IRA withdrawals.

Should workers need to take funds from their IRA, the money that’s withdrawn may be subject to federal and state taxes. If you are under the age of 59.5 when you withdraw, you may incur an early-distribution penalty of 10%. The reason the IRS imposes these fees is to deter workers from taking distributions from their IRA early, but there are situations where the IRS will waive early-distribution penalty fees.

Penalty-Free IRA Withdrawals

In many cases, the IRA early withdrawal penalty is unavoidable. However, the IRS reserves a few special circumstances that qualify you for penalty-free IRA withdrawals.

1. Health Insurance

You can use your IRA to pay for health insurance for yourself, your spouse or your dependents if you lose your job-provided health insurance plan and are unemployed for 12 weeks or more. However, this does not apply if you purchase your insurance through HealthCare.gov or have a private plan outside of the market.

2. Medical Expenses

If you do not have health insurance and an accident or medical emergency should happen, hospital expenses can be financially devastating. You can use your IRA for medical expenses if the cost is more than your insurance will cover for the year or if you have no insurance at all.

You’re also eligible to pull money out of your IRA and have medical expenses covered if your unreimbursed medical expenses are greater than 7.5% of your adjusted gross income. These exemptions allow you to pull the money out of your IRA without likely incurring the 10% early withdrawal penalty.

3. Your First Home

A penalty-free withdrawal of up to $10,000 — $20,000 for couples — can be taken from your IRA when you’re buying or building your first home. The funds can be used to pay for a down payment, closing costs, taxes and other fees that go into buying a home.

The IRS sees this home as your first home only if you or your spouse have not owned a home in the last two years. It’s also important to note that this $10,000 is a lifetime limit per individual, meaning that you can’t make this withdrawal every time you buy a house. The $10,000 mark is the absolute limit for the penalty-free homebuyer provision.

4. College Costs

IRA distributions are allowed to pay for college costs like tuition, fees, books and supplies. You can pay these costs for yourself, your spouse, your children or your grandchildren. Room and board expenses can also be covered for part-time students.

It’s important to note that IRA withdrawals for this purpose could reduce eligibility for financial aid for some students, as the IRA funds can be considered income. To reduce the chances of financial aid being withdrawn, you can wait until the student is in their final year at college.

5. Disability

If a doctor can determine that due to a mental or physical disability, you’re unable to find work or stay employed, you are eligible for penalty-free distributions from your IRA. One factor though is that the disability must be expected to last the duration of your life or result in your death. The funds can be withdrawn for any purpose in this circumstance, but make sure that you check with your IRA custodian regarding their policies for handling distributions due to disability.

6. Substantially Equal Periodic Payments (SEPPs)

A SEPP is another way to get penalty-free IRA withdrawals. You can set up a SEPP plan to receive specified annual distributions from your IRA over a five-year period or until you turn 59.5. The IRS has three different formulas to determine the amount you will receive.

A SEPP is often best for those who need to supplement their pre-retirement income. However, it’s important to note that if you quit or end your SEPP early, you’ll owe penalties and taxes on the amount you received, plus interest.

7. Inheritance

If you inherit an IRA as a beneficiary, you will not owe early withdrawal fees. However, there are some exceptions — spouses of the original account holder who are the sole beneficiary and elect to use the spousal transfer to roll over the funds to their IRA will still have to pay the early penalties.

8. IRS Levy

If you underpay your federal taxes, the IRS may impose a levy on your assets. If the IRS uses your IRA to draw funds for this levy, the 10% penalty will not apply.

9. Called to Active Duty Service

If you are a qualified reservist called to active duty service for longer than 179 days or indefinitely, you can make early withdrawals without penalty.

10. Birth or Adoption

When using your IRA for qualified expenses related to birth or adoption, the standard penalties do not apply.

When Are Withdrawals Mandatory?

After the age of 73, you must make the required minimum withdrawals if you have a traditional IRA. You can always withdraw more than the minimum, but your income taxes will increase commensurate with the higher withdrawal. A Roth IRA has no required minimum distributions (RMDs) for the owner, but beneficiaries must make withdrawals.

Manage Your IRA Withdrawals With Accuplan Benefits Services

In the end, most retirement advisors don’t like the idea of early distribution, but there’s no doubt it can be a lifesaver in many situations. Even though the above situations are exempt from early-distribution penalties, they still may be subject to federal and state taxes. Speak with your tax professional to determine whether or not certain amounts are taxable.

Accuplan offers individuals and businesses a wealth of knowledge on the rules and regulations surrounding retirement accounts and investments. We’re here to help you invest for your retirement how you want. Call our team at 888-897-1109, or schedule your appointment online.

Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.