Have you thought of how to withdraw funds from an IRA without penalty? This is a question most of us ask, especially when the need arises. Generally, if you withdraw funds from your IRA before you turn 59 ½, you will incur a 10% penalty. Here we discuss some of the situations when can you take money out of an IRA without penalty.
How To Withdraw From IRA Without Penalty: How It Works
1. First-Home Exclusion
If you plan to make your first home purchase, you can raise up to $10,000 of your IRA funds. If you and your spouse are first time home buyers, both of you can withdraw a combined $20,000 from your IRA’s. The IRS considers couples as first-time homeowners if the couple did not own some home two years before the purchase. However, you need to use the IRA funds in 120 days after withdrawal. This pays for the acquisition costs which includes buying, rebuilding, or financing the house.
2. School Costs
You may also avoid the penalty when you use the funds to pay for higher education. This applies to you, your spouse, your children, and even your grandchildren. Using the money for tuition, school supplies, and other fees will exempt you from the 10% early withdrawal penalty. In order to qualify, the student must be enrolled in an IRS-endorsed educational institution. Eligible institutions include a colleges, universities, or vocational schools authorized by federal student aid programs.
3. Military Service
There is no penalty for IRA withdrawals made by members of the military reserve. This comprises the Army, Marine corps, and Naval reservists including the National Guard. In order to qualify, you need to meet the following conditions:
- You were called or ordered to active duty after Sept. 11, 2001
- You were called or ordered to active duty for a time of 179 days or due to an indefinite time since you are a member of a reserve unit
The allotment should be taken for the duration of the active duty period to avoid incurring the penalty.
4. Roth IRA
Having a Roth IRA of at least 5 years, you can withdraw your contributions without incurring a penalty. Just as with traditional IRA, a Roth IRA member can utilize the first-home exemption to avoid the penalty. You may minimize the effects of the tax by taking the taxed contributions you made on your Roth.
5. Allowable Distributions
Some early withdrawals are penalty-free. While these are allowed, they are not conditions that anyone wants to be in. Some of these difficult situations are:
- Total and permanent disability
- Distribution of assets to a beneficiary at the time of death
- Settlement of medical premiums while unemployed
- Payment of excessive unreimbursed medical costs
Early withdrawal exemptions do not exclude tax bills when taking money out of your traditional IRA. When making an early withdrawal from such account, there is a regular tax rate on the amount.
As you plan for retirement and contribute towards it, it’s best to know the different life situations and conditions that allow you to withdraw from your investment account without penalty.
Have you withdrawn from your IRA without incurring a penalty? Please share us your experience in the comments section below.