If you have an IRA, you probably know that withdrawing before you are 59.5 is a no-no. This is because you will be hit with a 10% penalty for early withdrawal. However, there are some ways you can avoid the 10% penalty. The IRS (in publication 590) offers a number of exceptions to the rule. Here are 5 of them that you should definitely know about:
If you are disabled, you can take early withdrawals from your IRA. Normally, this is done so that you can supplement income lost because of your disability. In order to qualify, your disability must be expected to last for an indeterminate amount of time — or result in your death. You may need certification from a physician in order for the custodian of the IRA to approve the withdrawals without penalty.
2. Higher Education
You can take early withdrawals to help you pay for college. You can also take an early withdrawal to help your spouse or children pay for a higher education. Before you withdraw your money, though, make sure that the recipient of the funds is attending an approved institution. You can use the money for tuition, books, fees and supplies.
3. Medical Costs
Depending on your situation, you might be able to sidestep the 10% early withdrawal penalty if you use money in your IRA to pay for medical expenses. There are some fairly strict guidelines associated with this, though. You can only withdraw the money to cover expenses that are not covered by health insurance. Additionally, you can only withdraw the difference between the amount that’s not reimbursed and 7.5% of your AGI.
You can also get help to pay for your health insurance. But this only works if:
- You lost your job.
- You have received unemployment for at least 12 weeks in a row.
- You took the distributions during the year you received your unemployment benefits, or the following year.
- You take the distribution no more than 60 days after becoming re-employed.
Make sure to carefully consider your situation before withdrawing money early from your IRA to cover medical costs.
4. First Home
If you are buying your first home, you can withdraw money early from your IRA without penalty. You can do this whether you are buying, building or rebuilding. But it is very important that you qualify as a first time home buyer. This means that you cannot own a home for two years before you purchase. And you must be moving into a main residence — not getting a second or third home.
When you receive IRA assets as part of an inheritance, you can withdraw without penalty. However, you should understand that a spouse choosing to rollover the amount into a non-inherited IRA does not get the same good treatment. Make sure you properly document the transaction so that you are not charged the penalty.
Should You Withdraw Early?
Even if you can take an early withdrawal from your IRA, it is not always the best idea. Once that money is out of the account, it is no longer earning compound interest and working for you. Consider other options, if possible, before your withdrawal. Carefully contemplate the situation, and then determine whether it is truly a good idea to take an early withdrawal.
This post was featured in the Carnival of Wealth
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