You must be 59 and a half to withdraw from your IRA. However, there are exceptions to the 10% early withdrawal penalty tax.
The whole point of an IRA is to put money away for retirement and let it grow. When you don’t allow the money in your IRA to grow and you withdraw before the age of 59 ½, there is an early withdrawal penalty of 10% tacked onto the already existing income tax. That means you’ll end up paying an IRA withdrawal tax when filing your tax return.
IRS Withdrawal Before 59 ½
Maybe you want to pay off your high debt or maybe you just need cash. Whatever your case may be, if you aren’t 59 ½ and desperately need money from your IRA, you can withdraw early and will be required to pay penalty tax. The penalty is 10% on top of your existing income taxes.
Exceptions to the 10% IRA Withdrawal Penalty
There are exceptions to the 10% early withdrawal penalty.This means if you fall within one of the following categories you can withdraw from your IRA before the age of 59 ½ without facing ugly penalties.
The exceptions are as follows;
1. Disability: According to the IRS, if you become a disabled individual before 59 and half you are free to withdraw.
2. Buying your First Home: If you are buying your first home, you can withdraw up to $10,000 from a traditional IRA or Roth IRA before 59 ½ and not be penalized (but remember, you will stay have to pay normal income taxes on it). The money you withdraw, must be used for buying, building or rebuilding of a home within 120 days of withdrawal.
3. Higher Education: The IRS waives the 10% penalty if you use the money on college expenses including tuition fees, books, room and board along with other college fees. You can use this higher-education exception on yourself, your spouse, children or grandchildren.
4. SEPP or Substantially Equal Periodic Payments: If you need money from your IRA for more than a year, you can set up a plan with the IRS which allows you to set up a plan to avoid the 10% penalty.
SEPP is based off of ;
- Your current age,
- Your life expectancy and
- Your “Applicable Federal Mid-term Rate”.
With this plan, the IRS will tell you an exact amount of how much you can withdraw for five years (or until you’re 59 ½).
5. Un-Reimbursed Medical Expenses: If you need to withdraw from your IRA or Roth IRA early in order to pay medical expenses, you can penalty-free. This applies if you do not have insurance coverage or if your medical expenses are more than your insurances covers for the year. This exception applies to the un-reimbursed medical expenses of:
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Yourself
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Your Spouse
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Your Dependents
It’s important to note if you are withdrawing for medical expenses that costs more than your insurance covers for the year, the differences between these expenses and 7.5% of your adjusted gross income is eligible the the exception.
6. Medical Insurance: If you are unemployed you can take distributions from your IRA without a penalty to pay for your medical insurance. However you must meet the following requirements;
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You lost your job.
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You received unemployment compensation from federal or state law for 12 straight weeks.
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You received the distributions in the year you received unemployment compensation or during the following year.
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You received the retirement distributions no more than 60 days after you were re-employed.
7. Active Duty Call: Distributions for qualified reservists occurring past September 11, 2001 don’t have to pay the 10% penalty when withdrawing.
8. IRS Levy: If you’ve had an IRS levy and amounts have been withdrawn from your IRS for it, you are not subject to the 10% penalty.
9. Death: It’s probably not something you want to think about, but in the event of you dying, your heirs will not have to wait to collect from your IRA.
Other IRA Withdrawal Age Rules
According to IRA tax rules, the withdrawal age is 59 ½. If you already are 59 ½, you are not required to withdraw from your IRA. However, by the time you are 70 ½, you must take your first distribution, a mandatory IRA withdrawal by April 1st of the next year. (Not doing so will end up in a tax penalty of 50%)
The IRA age withdrawal rules are pretty clear. If you do or do not fall within the penalty exceptions list, it’s best not to take part in an IRA early withdrawal (unless you absolutely need to). If you end up withdrawing from your IRA (early or not), you will need to report it when filing your taxes. You can file state and federal taxes online anytime with RapidTax!
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