IRA Withdrawals that Escape the 10% Penalty
An IRA, or Individual Retirement Account, is a tax-advantaged account that is subject to special rules regarding contributions and withdrawals. One of the central rules of IRAs is that withdrawals prior to age 59½ are generally subject to a tax penalty.
Yet, policymakers acknowledged that extenuating circumstances might require access to these savings. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.
Penalty-Free Withdrawals
Outlined below are the circumstances under which individuals may qualify to withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.[i]
Death – If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into their IRA, they will forfeit this exception.[ii]
Disability – Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.[iii]
Substantially Equal Periodic Payments – You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.[iv]
Home Purchase – You may withdraw up to $10,000 toward the purchase of your first home ($20,000 for a married couple). You cannot have owned a home within the last two years.3
Unreimbursed Medical Expenses – This exception covers medical expenses in excess of 10% of your adjusted gross income.3
Health Insurance – After a job loss, there are rules in place that allow the purchasing of health insurance, without penalty.3
Higher-Education Expenses – Funds may be used to cover higher-education expenses, such as tuition, student fees, textbooks, supplies, and equipment. Only certain institutions and associated expenses are permitted.3
Active Duty Call-Up – Reservists who make an IRA withdrawal during a period of active duty of 180 days or longer do not have to pay a 10% early withdrawal penalty.3
As always, be sure to speak with a tax professional about your specific situation. Contact www.capsouthwm for more information.
Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. This material has been prepared for planning purposes only and is not intended as specific tax or legal advice. Tax and legal laws are often complex and frequently change. Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.
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[i] https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14
[ii] https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp
[iii] https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty
[iv] https://www.investopedia.com/articles/retirement/02/112602.asp
