9 Penalty-Free IRA withdrawals

Last Updated on 6th July 2022 by Jeffrey Camerda

Individual retirement accounts (IRAs) are set up to provide you with additional income in your golden years. You may choose to leave your IRAs alone until retirement, but unexpected costs may necessitate early withdrawal. An early withdrawal penalty of 10% applies to traditional and Roth IRA distributions, however there are exceptions that allow you to avoid the penalty.

IMPORTANT THOUGHTS

  • IRA contributions may be withdrawn at any time from a Roth IRA.
  • Roth IRA profits that are withdrawn before the age of 59½ are subject to a 10% penalty.
  • Traditional IRA withdrawals before the age of 59½ are subject to a 10% penalty tax, regardless of whether the withdrawals are contributions or profits.
  • The Internal Revenue Service (IRS) allows you to take early withdrawals from an Individual Retirement Account (IRA) without incurring a penalty.

IRA Withdrawals During Retirement

Traditional Individual Retirement Accounts (IRAs)

Traditional Individual Retirement Accounts (IRAs) are tax-advantaged ways to save for retirement. Up-front tax benefits are provided by traditional IRA accounts. Donations made throughout the year might be deducted from your income if certain criteria is met. During retirement, you will, however, be subject to income tax at your then-current tax rate on any withdrawals.

Roth IRA

It’s possible to make contributions to a Roth IRA using pre-tax money. As a result, adding funds to your account won’t result in any tax savings. But if you’re above the age of 59½, you may make tax- and penalty-free withdrawals from a Roth if you’ve had at least five years since your initial contribution. As an extra benefit, no taxes or penalties apply when you remove your contributions (but not the gains from those contributions).

Penalty-Free IRA Withdrawals: What Are They?

Early withdrawals from an Individual Retirement Account (IRA) are subject to a 10% penalty from the Internal Revenue Service (IRS). The penalty may be avoided in certain cases, though. A traditional or Roth IRA may be withdrawn penalty-free in nine of the following situations. There are two types of Individual Retirement Accounts: the Traditional Individual Retirement Account (TRIA) and the Roth Individual Retirement Account (ROTH).

1. Medical Expenses That Were Not Paid

It is possible to withdraw penalty-free distributions from your Individual Retirement Account (IRA) to pay for out-of-pocket medical expenditures that are not covered by insurance.

In order to be eligible, you must pay for your medical expenditures in the same calendar year that you request the reimbursement from your health savings account. Additionally, your unpaid medical bills must equal or exceed 10% of your 2021 adjusted gross income (Gross Domestic Product).

If your AGI is $100,000 and your unreimbursed medical expenditures are $15,000, your maximum penalty-free distribution is $5,000, which is the difference between $15,000 and 10% of your AGI ($10,000).

2. Unemployed people’s health insurance premiums are higher than they would be if they were working

Your IRA may be used to pay for health insurance premiums while you’re jobless without incurring any penalties. You must satisfy certain requirements in order for the distribution to be exempt from penalty:

  • You were laid off from your job.
  • You were paid unemployment benefits for a total of 12 weeks in a row.
  • In either the year that you got unemployment benefits or the next year, you took the payouts.
  • After returning to work, you got the dividends no later than 60 days.

3. Incapacity for Work that Is Not Reversible

The IRS allows you to remove money from your IRA without incurring the 10% penalty if you become permanently handicapped and are no longer able to work. The distribution may be used for any purpose. As a precaution, be aware that your plan administrator may request evidence of impairment before allowing you to withdraw without penalty.

4. The cost of education 

The cost of a college education has risen significantly in recent years. Consider using your IRA if you’re responsible for paying for your child’s school costs. If you utilize IRA assets to pay for eligible higher education expenditures for yourself, your spouse, or your kid, you may avoid the 10% penalty.

Tuition, fees, books, materials, and equipment necessary for enrollment are all included in the definition of qualified higher education costs. For students who are enrolled at least half-time, room and board are also provided. A 10 percent penalty is only applied to the first $10,000 of a taxpayer’s taxable income.

Expenses that may be deductible should be discussed with a reputable tax advisor. Check with the school to see whether it meets the program’s standards.

5. Inheritance of an Individual Retirement Account (IRA)

The early withdrawal penalty of 10% does not apply if you are the beneficiary of an IRA.

If you are the only beneficiary and the spouse of the original account holder, the exemption does not apply to you (by which you roll over the funds into your own non-inherited IRA). The IRA is considered as if it were yours from the start in this situation. Early withdrawal penalties of 10 percent remain in effect.

It is the responsibility of your IRA provider to provide the code “4” in box seven of IRS Document 1099-R, the form used to record the distribution, when you take a death distribution. Find out what paperwork you’ll need to complete your transaction from your IRA custodian or trustee.

6. To Purchase, Construct, or Reconstruct a House

You may take out up to $10,000 from your IRA to purchase, construct, or remodel a house without incurring a penalty. If you’ve never bought a house in the last two years, you’re eligible for this program. However, even if you’ve owned a house in the past, you may still qualify as a first-time purchaser today.

Your spouse, if you’re married, may contribute an additional $10,000 from their IRA to your plan. In addition, if your kid, grandchild, or parent qualifies as a first-time homeowner, you may use the money to assist them out.

7. Periodic Payments That Are Approximately Equal in Amount

If you fulfill certain criteria, the IRS permits penalty-free withdrawals from your IRA for a period of time.

Basically, you may take out the same amount of money every year for the next five years or until you reach the age of 59½, whichever comes first, using one of three IRS-approved ways. SEPPs, or taking substantially equivalent periodic payments from your IRA, are the technical term for this strategy.

8. To Pay a Levy Due to the IRS

The Internal Revenue Service (IRS) has the right to seize funds from your IRA if you owe taxes. Taxes levied by the Internal Revenue Service are exempt from the 10% penalty. The only way to avoid a tax charge is to keep the money in your account and pay the taxes. The exemption would not apply in this situation, and you would be liable for the 10% penalty.

9. Activation Orders Received

The 10% penalty does not apply to distributions made by qualified reservists. A military reserve or National Guard member must have been summoned to active service for at least 179 days after September 11, 2001, in order to receive these payments.

It is possible to repay dividends even if the repayment contributions exceed yearly contribution restrictions in particular situations. The only catch is that you can’t do it more than two years after you leave the military.

Final Verdict

Despite being excluded from the early distribution penalty in the aforementioned instances, the federal and state governments may nevertheless levy taxes on them. When it comes to taxes, it is best to get the advice of a qualified tax specialist. Taking out a personal loan may be a viable alternative to dipping into your IRA’s savings.

Once you’ve claimed the exemption from the early distribution penalty, your IRA custodian may ask you to submit IRS Form 5329 together with your tax return, unless the amount reported on IRS Form 1099-R.2112 is exempt.

Jeffrey Camerda

Dr. Jeffery Camerda, PhD, is a financial planner who specializes in wealth management and retirement planning. With a PhD in Economics and Financial Planning, Jeffery represents the highest level of financial planning expertise and achievement in the USA In addition to preparing you for a career in financial planning, a PhD in economics and finance also prepares you for academic pursuits, such as becoming a university professor in teaching or doing research. Here at the Wealth Builder, our financial advisory company was founded in 2007 and services all across the USA with over 16 years of expertise. In order to provide the finest advice and services, we pay close attention to the specific financial circumstances and requirements of each client. In order to guarantee that our clients don't get a sales pitch for insurance or investments, as well as a lack of conflict of interest from a prospective commission-bearing corporations, Jeffery focuses on fee-based services. Financial planning for wealth managers, financial well-being workshops, and personal financial planning packages are all part of the company's offering. Jeffrey Camarda, PhD, CFA, EA is also the founder of the Family Wealth Education Institute, is a member of the Financial Planning Association and serves as the Chairman of Camarda Wealth Advisory Group

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