When You Can Tap Into Your IRA Without Penalty

by on Mar 29, 2016 Categories: retirement planning, wealth management, financial planning

Even those who are diligent in saving and planning for retirement can be faced with significant unplanned expenses that lead them to consider tapping into their IRA. Under most circumstances, any withdrawals from your IRA taken before age 59 ½ are subject to both income tax and a 10% penalty. However, there are exceptions that allow you to use money from your IRA without paying the 10% penalty. Here are some of the most common:

Purchasing your first home. This exception allows first time home buyers to withdraw up to $10,000 from their IRA without the 10% penalty. If both spouses are first time home buyers, they can make the withdrawal from their IRAs coming up with $20,000. Although you are able to avoid the early withdrawal penalty, any amount taken out of the IRA is still subject to income tax at your ordinary income rate.

College. Withdrawals can be made to cover college expenses for you, your spouse or your children. This not only includes tuition, but also books, supplies, miscellaneous fees and even housing.

Health Insurance. No, you cannot withdraw funds from your IRA to cover health insurance simply because out of pocket costs are increasing. Health insurance is only an exception to the 10% penalty if you have lost your job and collect unemployment compensation for a certain amount of time. The distribution must be taken during the year you received unemployment compensation or the penalty still applies.

Medical Expenses. Only certain medical expenses qualify, and the costs generally have to exceed a certain percentage of your annual household income. If you are surprised with significant medical expenses for you or your spouse, it’s best to contact your accountant or financial planner who can help determine if distributing funds from your IRA is the best course of action and whether the penalty will apply.

Disability. In the event of disability, you are permitted to withdraw funds from your IRA without penalty. The only real stipulation is you may have to provide proof of disability.

 

In each of these instances, you can avoid the penalty, but you will still pay income tax on your distributions. There is no general rule to help determine if using IRA funds is the best decision because it completely depends on your individual financial situation and what other options are available. You should always keep in mind the tax implications of withdrawing from your IRA as it may make it a less appealing option. As is the case with most important financial decisions, if you don’t know whether you should do something or not, take the time to sit down with a professional financial advisor who can lay out your options and help you understand the impact each may have.