Exceptions to Withdrawal Penalties
Exceptions to Withdrawal Penalties in a Traditional IRA
Sometimes we have to break into the piggy bank also known as our IRA. When you have a Traditional IRA and you take a withdrawal from your account before you reach the age of 59.5, your withdrawal will be looked at as an “Early Distribution”. Most “Early Distributions “will subject to tax plus a 10% penalty.
You’ll want to discuss your plans with your competent tax advisor first, of course, to understand your tax consequences.
There are exceptions to the 10% penalty rule:
- You are 59.5 years old
- You died
- You are disabled
- You have an IRS levy
- You chose to take “Substantial Equal Periodic Payments” (72(t)
- You need to pay higher education expenses
- You’re a first-time home buyer
- Those medical expenses aren’t going to pay themselves
- Lost your job but need to pay your health insurance
- You’re a Qualified Reservist
- A natural disaster means you need the money
The year you turn 59.5 you can smile widely as it means any Traditional IRA distribution you take (where it may be taxable) is now penalty-free. You will most likely owe taxes, but no penalty.
When you pass away your beneficiaries can request a withdrawal of your IRA and receive it without the extra sting of the 10% hit. A death certificate will most definitely be required. Provide this to your IRA custodian at the time you request the withdrawal.
Another of the exceptions is if you are disabled. You will need to provide a physician’s statement or Form 1040 Schedule R “Credit for the Elderly or the Disabled,” Then your IRA funds can be tapped to meet your needs.
Back taxes got you worried? When the IRS comes knocking on your door to collect a levy you can pay from your IRA and the distributions are not subject to the tax penalty.
You’re taking a “72(t)” or Substantially Equal Periodic Payments from your IRA. When you do this you make a commitment to the IRS to take taxable withdrawals over your life expectancy (or joint life expectancy with a beneficiary). Don’t go this alone, get tax advice. Good news is these payments come out without the 10% bite.
Going to college? Or, maybe it’s your spouse or your child or even your parent? Nice to know you can use your IRA for tuition, fees, books, supplies, equipment and more. Yay! Exceptions are the rule when planning for school.
Haven’t owned a principal residence in the past two years? Congrats, you qualify to be a “First-Time Homebuyer” and your IRA can help you get into a new house. There is a lifetime max of $10,000 per IRA owner. Now some of the funds you set aside can be used penalty-free to purchase a home you live in. And it’s not just for your own house. Your IRA can be used for a house for your spouse or child or parent. Again talk with your tax person and keep in mind that lifetime cap.
Paying medical expenses with your IRA funds has a bit of a catch. You can use the IRA without penalty only for unreimbursed medical expenses that are greater than 10% of your Adjusted Gross Income (AGI).
Just because you lost your job it does not mean you have to miss your health insurance payments. If you have received unemployment for at least 12 consecutive weeks, you qualify to let your IRA help you out paying those premiums.
Certain military reservists can take a penalty-free distribution from their IRAs if they received a call to active duty for 180+ days. That distribution is taxable but it’s not penalized.
And finally, when you’re recovering from certain natural disasters you can check to see if you qualify for penalty-free IRA cash. So when you face an emergency, your IRA may be a resource for you.
The IRS has all these exceptions as a way to give you a break (a 10% break) when you may need it most. Your tax advisor is your best friend and guide during these times so call them up and discuss your situation with them before you pull the trigger on your withdrawal.