The IRA is a great retirement savings vehicle; money grows on a tax-deferred basis and that’s a good thing. Eventually, though, you have to pay the IRS piper when you choose to withdraw funds for retirement or when you’re forced to withdraw the Required Minimum Distribution at age 72.
Let’s be clear. You can take money from your IRA anytime you want. Do it before age 59 ½ and you’ll pay taxes plus that nasty 10% early withdrawal penalty. But hidden in a dusty corner of the IRS code are 5 exceptions that allow you to take money before 59 ½ without paying the penalty.
Unreimbursed Medical Expenses
Unreimbursed is the key word here. You can withdraw money from your IRA to pay unreimbursed medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI).
For example, if your AGI is $100,000 and you have $10,000 in medical expenses not covered by insurance, you can withdraw $2500 without penalty. ($100,000 x 7.5%=$7500. $10,000 expenses – $7500=$2500)
The unreimbursed expenses must be paid in the same year you make the IRA withdrawal.
First Time Home Purchase
The IRS definition of first-time home purchase means you haven’t owned a home in the past 2 years. It does not mean you’ve never owned a home. You can withdraw $10,000 without penalty toward the purchase. This is a lifetime limit. So, if you use the entire amount to purchase this house you won’t be allowed any more penalty-free IRA withdrawals for future home purchases.
Want to go back to school? You can withdraw funds without penalty for qualified expenses such as tuition, books, fees, and required supplies. You have to be enrolled in a qualified higher educational program and be in school at least half-time.
This exemption also applies if you’re helping a spouse or child with college expenses.
If you’ve been classified as permanently disabled, penalty-free withdrawals from your IRA are allowed. You will have to show proof of permanent disability before you can withdraw.
Substantially Equal Payments
You can withdraw money from your IRA without penalty anytime at any age by using substantially equal payments or rule 72(t). The IRS will determine what amount you can receive each year based on your life expectancy. That’s the amount you must withdraw each year. Once you start substantially equal payments you can’t stop them until you’re 59 ½ or you’ve been taking the withdrawals for 5 years, whichever is longer. If you stop the withdrawals or change the amount of the withdrawal, you’ll get hit with the 10% early withdrawal penalty retroactively from the time you first began receiving the payments PLUS interest. Think long and hard before you choose this option.
If you put money into your IRA but then decide you need it back, you can generally “take back” one contribution made to a traditional IRA without paying tax, as long as you do it before the tax filing deadline of that year and do not deduct the contribution from your taxes.
You can also withdraw money from a traditional IRA and avoid paying the 10% penalty if you roll the money over into another qualified retirement account (such as a Roth IRA) within 60 days. But then you wouldn’t actually be able to spend it.
Roth IRA Contribution Withdrawals
All the options above have been associated with Traditional IRAs. This one is about withdrawals from a Roth IRA.
Because Roth IRA contributions are made with after-tax money, the IRS allows you to withdraw that money without penalty at any time. If you choose this option be careful that you’re withdrawing contributions and not earnings on the money in the Roth. If you withdraw earnings before you’re 59 ½ you’ll likely be subject to the 10% early withdrawal penalty.
When it comes to withdrawals from any IRA, know the rules and understand the consequences. The last thing you want to do is fall out of the good graces of the IRS!