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Apr 14

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Taking Money Penalty Free from Your IRA?

One of the most common ways to save for retirement is through an Individual Retirement Account, commonly known as an IRA.  You must wait until age 59 ½  before you can withdraw money from your IRA.  But let’s say you have been saving diligently and you need money to cover immediate expenses.  Is there a way to tap your IRA account without facing penalties?  In some instances, yes.  Two popular ways to do a penalty free withdrawal involve higher-education expenses and a purchase of your first home.

The IRS does not assess a penalty on early withdrawals from your IRA when the money goes towards qualified schooling costs for yourself, your spouse, or your children or grandchildren.  The institution must be IRS approved and meet federal student aid program requirements.  Institutions may be a college, university, vocational school or post-secondary institution and can be public, private or non-profit.  IRA funds can be used to pay tuition, fees, books, supplies and other required equipment.  If the student is enrolled at least half time, IRA funds may be used to pay for room and board.

The IRS allows each person to contribute $10,000 of IRA funds towards the purchase of their first home.  If married, each spouse may pull $10,000 out of their respective IRA accounts for a total of $20,000.  The qualification to be a first time buyer is very lenient.  The IRS considers a first time buyer someone who did not own a principal resident at any time during the previous two years.  You can also share your IRA funds  as the IRS says the first time home buyer can be you, your spouse, one of your children, grandchild, or a parent.  You must use funds withdrawn from your IRA within 120 days of withdrawal.

For traditional IRA (where you contribute money pre-tax), you will be taxed on the withdrawal in the same tax year.  For Roth IRAs (where you make contributions with after tax dollars), if you had the account for five years or more, you will pay no penalty and have no IRS bill.  If you have had your Roth IRA for less than five years, the withdrawal is considered an early withdrawal.  You will be able to used the first time home buyers and avoid penalties, but may have to pay income tax on earnings that are withdrawn.

There are also other, less widespread, penalty-fee ways to withdraw funds from your IRA such as:

  • Being a Member of the Military Reserves
  • Payment of excessive unreimbursed medical expenses
  • Payment of medical insurance premiums while unemployed
  • Total and permanent disability
  • Distribution of account assets to a beneficiary after you die

Before making any IRA withdrawals, you should contact a tax professional and/or your financial advisor.

About the author

Anand Khemlani

I am a founding member of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), a Certified Fraud Examiner (CFE) and am a licensed Real Estate Broker. I regularly serve as an expert witness involving results of my forensic accounting assignments and damage analyses. My resume is available on Fulcrum's website

Permanent link to this article: http://betweenthenumbers.net/2011/04/taking-money-penalty-free-from-your-ira/

2 comments

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