An IRA, or Individual Retirement Account, is a tax-advantaged savings 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 because policymakers sought to create a disincentive to use these savings for anything other than retirement.1
Yet, policymakers acknowledged that extenuating circumstances might require access to these savings prior to one’s second act. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.
Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.1
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.
Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.
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.
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.
Unreimbursed Medical Expenses
This exception covers medical expenses in excess of 10% of your adjusted gross income.
After a job loss, there are rules in place that allow the purchasing of health insurance, penalty free.
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.
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.2,3,4
As always, be sure to speak with a tax professional about your specific situation.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.
1 – https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14 [6/14/18]
2 – https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp [2/21/18]
3 – https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty [11/7/18]
4 – https://www.investopedia.com/articles/retirement/02/112602.asp [10/7/18]
“Wisdom Wealth Strategies, LLC is a registered investment advisor offering advisory services in the states of Colorado and California, and in other jurisdictions where exempted.” This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates.