Your IRA contributions are made to supplement your income throughout your retirement. While you’d like to keep your IRAs whole until retirement, unavoidable costs can compel you to take part of your assets out sooner. You may still pay the 10% penalty if you take withdrawals from your traditional or Roth IRA too early. Still, early withdrawal exceptions allow you to avoid the penalty.
This article discusses the exceptions to the 10% early withdrawal penalty. A list of the exceptions is provided below.
1. Unreimbursed Medical Costs.
You may be qualified to make a penalty-free withdrawal from your IRA to pay for these costs if you don’t have health insurance or have out-of-pocket medical expenses that aren’t covered by insurance.
The medical expenses must be paid in the same fiscal year as the withdrawal to qualify for it. Furthermore, your medical expenses that were not reimbursed must equal more than 10% of your 2021 adjusted gross income (AGI).
The maximum amount you can withdraw without incurring penalties, for instance, is $5,000, which is the difference between $15,000 and 10% of your AGI ($10,000) or between your AGI and your unreimbursed medical expenses ($15,000).
2. Permanent Disability
The IRS allows an individual to take money out of an IRA without incurring the 10% penalty if you become permanently disabled and cannot work. The distribution can be utilized in any way. However, remember that your plan administrator may request documentation of your condition before authorizing a penalty-free withdrawal.
3. Health Insurance Premiums When You’re Unemployed
You can withdraw from your IRA without incurring penalties to cover your health insurance costs if you are unemployed. The distribution will be exempt from penalties if you meet these requirements:
1. You were fired.
2. You received unemployment benefits over 12 weeks.
3. You took the distributions when you got unemployment benefits or the year after.
4. You received the distributions within 60 days of returning to work.
4. You Receive IRA as an Inheritance
The 10% early withdrawal penalty is waived if you are an IRA beneficiary and take distributions. The exception doesn’t apply if you’re the sole beneficiary, the account holder’s spouse, and you want to transfer your account share to your spouse (to roll over the funds into your own non-inherited IRA). The IRA will be handled as if it were yours from the start in this situation, and the 10% early withdrawal penalty will still be in effect.
When completing IRS Form 1099-R (the form used to report the distribution), your IRA provider should indicate in box seven that the money is a death distribution by entering the code “4.”
5. Costs of Higher Education Expenses
A college education is a massive expense in today’s world. Your IRA could be a helpful source of funding if you’re paying for your education. With IRA funds, you can avoid the 10% penalty when paying for qualified higher education costs for you, your spouse, or your child.
Tuition, fees, books, supplies, and other costs related to a higher education program are considered qualified higher education expenses. Accommodations and board for students enrolled at least half-time are also covered.
Be sure to speak with a reputable tax expert to determine if your expenses count toward the deduction. Also, ensure the school meets the criteria for participating in the program.
6. To Purchase, Build or Rebuild a Home
You can take withdrawals that are penalty-free from your IRA of up to $10,000 (lifetime maximum) to buy, develop, or reconstruct a home. Not owning a property in the preceding two years qualifies you as a “first-time” homebuyer.
If you’re married, your spouse can contribute an additional $10,000 from their IRA. You can also utilize the funds to support a parent, grandparent, or child as long as they fit the qualifications of a first-time homebuyer.
7. Periodic Payments That are Significantly Equal
The IRS permits you to withdraw money from your IRA without incurring penalties if you need to make regular withdrawals from it for a few years.
Essentially, you must take a certain amount out every year for five years or until you reach age 59½, whichever comes first. This amount is computed using one of three IRS-preapproved procedures.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Joe Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants.
We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.
Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
