When Withdrawing Funds from your IRA are Penalty-Free

IRA withdrawal

It’s not uncommon that contributions that workers make to their IRA are prematurely withdrawn. An IRA is intended to supplement income in retirement years, but as the future and some circumstances are often out of our control, an IRA is sometimes used in other ways than retirement.

Should workers need to take funds from their IRA, the money that’s withdrawn may be subject to federal and state taxes, and if the person withdrawing the money is under age 59.5 when this occurs, another early-distribution penalty of 10% may be incurred. 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.

Health Insurance

If you lose your job, and subsequently your health insurance (unless your insurance is purchased through HealthCare.gov, or have a private plan outside of the market) and are unemployed for 12 weeks or more, you may use your IRA to pay for purchasing health insurance for yourself, your spouse, or your dependents.

Medical Expenses

If you do not have health insurance and something like an accident or medical emergency should happen, the expenses that go along with a hospital can be financially devastating. You’re able to take distributions from your IRA if your medical expenses are 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 you have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income. These exemptions allow you to pull the money out of your IRA without likely incurring the 10-percent early withdrawal penalty.

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.

College Costs

IRA distributions are allowed to pay for college costs like tuition, fees, books and supplies, and yourself, your spouse, your children or your grandchildren are eligible. Room and board expenses can also be covered for part-time students. It’s important to note that IRA withdrawals for this purpose could possibly reduce eligibility for financial aid for some students, as the IRA funds can be considered income, therefore possibly disqualifying aid. Waiting until the student is in their final year at college reduces the risk of financial aid being withdrawn.

Disability

If a doctor can determine that due to a mental or physical disability, that 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.

In the end, most retirement advisors don’t like the idea of early distribution, but there’s no doubt it can be a life-saver 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.

Author: Tanya

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