Need to withdraw from your IRA? Here's how to avoid a penalty.
When you deposit money into your individual retirement account (IRA) it's likely that you don't expect to withdraw your savings for many years, if not decades. However, sometimes life changes require you to get cash today, and as a result, you may need to liquidate your IRA account.
Usually, if you withdraw from your IRA before
your full retirement age, you'll incur a 10% penalty. But here are several
extenuating circumstances that can allow you to withdraw your retirement
savings without paying this hefty fee.
Disability
If you become permanently disabled and unable
to work, you may be able to use your IRA funds to pay for living expenses. In
this case, a disability can be physical and/or mental to qualify.
Medical expenses and health
insurance
If your unreimbursed medical expenses exceed
7.5% of your adjusted gross income, your IRA funds can be used to pay for your
remaining expenses. Additionally, if you aren't employed, you may be able to
pay for health insurance premiums by withdrawing retirement funds without
penalty.
Death
It may sound obvious, but if the IRA owner
passes away, their retirement account can be liquidated without penalty. Any
capital liquidated from the account will go to the plan's beneficiaries as
previously set by the account owner. The only caveat is if the beneficiary
chooses to roll the funds over into their IRA, in which case they will not be
able to use this exception.
IRS Levy
An IRS levy is when the government seizes your
property to satisfy a tax debt. However, if you need additional funds to pay
your debt, you can withdraw from your IRA to satisfy your government debts.
Birth or Adoption
New parents incur a lot of expenses. That's
why the IRS allows parents to withdraw up to $5,000 penalty-free from a
retirement account to pay for the birth or adoption of a child, including
hospital bills and adoption-related expenses.
Disaster Relief
Encountering a natural disaster can be
devastating. Fortunately, the federal government won't penalize you if you're
affected by a natural disaster. Keep in mind that the event must be classified
as a federally declared disaster in order to qualify for penalty relief.
Active Duty Call-Up
Military members who are called up to active
duty must leave their job to serve their country. As a result, the IRS allows
those sent into active duty for more than 180 days the ability to withdraw IRA
funds penalty-free.
First-Time Home Purchase
As a first-time home buyer, you can leverage
your retirement savings to help pay for your down payment. This is limited to a
withdrawal of $10,000. One important detail is that in order to take advantage
of this penalty-free withdrawal, you'll need to close on your home within 120
days of withdrawing your funds.
Double-check before withdrawing
It's good to know the reasons you can withdraw
funds penalty-free from your IRA account. But before you go ahead and withdraw
your money, double-check that your withdrawal reason qualifies. Also, be sure
to document any withdrawals and receipts for expenses just in case the IRS
requests information from you at a later time.