IRA Withdrawals that Escape Tax Penalty

March 13, 2020

The reason withdrawals from a traditional Individual Retirement Account prior to age 59 1/2 are generally subject to a 10% tax penalty is that policymakers wanted to create a disincentive to use these savings for anything other than retirement.

Yet, policymakers also recognize that life can present more pressing circumstances that require access to these savings. In appreciation of this, the list of withdrawals that may be taken from a traditional IRA without incurring a 10% early withdrawal penalty has grown over the years.

Penalty-free Withdrawals

Outlined are the circumstances under which individuals may withdraw from an IRA prior to age 59 1/2, without a tax penalty. Ordinary income tax, however, generally is due on such distributions.

Death

If you die prior to age 59 1/2, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into his or her IRA, he or she will forfeit this exception.

Disability

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 59 1/2 or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.

Home Purchase

You may take up to $10,000 toward the purchase of your first home. (According to the Internal Revenue Service, you also qualify if you have not owned a home in the last two years). This is a lifetime limit.

Unreimbursed Medical Expenses

This exception covers medical expenses in excess of 10% of your adjusted gross income.

Medical Insurance

This permits the unemployed to pay for medical insurance if they meet specific criteria.

Higher Education Expenses

Funds may be used to cover higher education expenses for you, your spouse, children or grandchildren. Only certain institutions and associated expenses are permitted.

IRS Levy

Funds may be used to pay an IRS levy.

Active Duty Call-Up

Funds may be used by reservists called up after 9/11/01, and whose withdrawals meet the definition of qualified reservist distributions.

This information should not be construed by any client or prospective client as the rendering of personalized investment advice. All investments and investment strategies have the potential for profit or loss, and there can be no assurance that the future performance of any specific investment or investment strategy including those discussed in this material will be profitable or equal any historical performance levels. Investment strategies such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Any target referenced is not a prediction or projection of actual investment results and there can be no assurance that any target will be achieved.

Originally Published on the Valdosta Daily Times
Written by Stacy Bush

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