Generally, the IRS will impose a 10 percent early distribution penalty if you withdraw assets from your traditional IRA before the age of 59½. So, what would happen if you needed to tap into your IRA before then? Sure, you’ll have to pay income tax on the untaxed portion of the IRA. But are there ways to avoid paying that 10 percent early distribution penalty? Luckily for some, the IRS offers several exceptions to this penalty. Here are four of the most important ones.
1) First-Time Home Buyers
You may withdraw up to $10,000 (lifetime) from your IRA to buy, build, or rebuild your first home.
- You cannot have a present interest in a main home during the two-year period ending on the date of acquisition of the home for which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.
- You may also qualify for the exemption if you’re helping your spouse, child, grandchild, or parent buy a home.
2) Medical Expenses
You may take penalty-free distributions from your IRA to pay for medical expenses that are not reimbursed by health insurance.
- The expenses must exceed 10 percent of your adjusted gross income.
- If you have been collecting unemployment for 12 consecutive weeks, you may take penalty-free distributions from your IRA to pay for health insurance.
3) Higher Education
Distributions from your IRA that are used to pay for qualified higher education expenses—such as tuition, fees, books, supplies, and even room and board (if you’re enrolled at least half-time)—may be taken penalty free.
- The money must be used by you, your spouse, your children, or your grandchildren.
- The distribution must be for an eligible higher educational institution.
You must be permanently disabled and unable to earn a living to qualify for the exemption.
- Authorization must be obtained from a physician.
Should You Take Advantage?
To be sure, these exceptions are great for avoiding the early distribution penalty. But in the end, they will not eliminate your tax bill. Everyone’s financial situation varies, so be sure to speak with your CPA to determine whether you should take advantage of any of the exemptions listed here.
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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kristen Smith is a guest blogger, representing Axial Financial Group in Burlington, MA. She offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. CRR, LLP (also represented as CRR, CRR CPA), Axial Financial Group, and Commonwealth Financial Network are separate and unrelated entities. Kristen can be reached at 781-273-1400 or email@example.com. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.