9 Ways to Get Money Out of Your IRA Early - Without Paying the 10% Penalty

9 Ways to Get Money Out of Your IRA Early - Without Paying the 10% Penalty


No matter how carefully you budget your money, unavoidable expenses will eventually catch up to you. While an emergency fund can cover many of your expenses, there are times when your best option is to tap into your retirement savings. Generally, early withdrawals from your IRA will result in a 10% tax penalty. However, there are certain specific circumstances under which you can make a withdrawal without this penalty. Here's your guide to early withdrawal exemptions.

In order to take advantage of these exemptions, you must have had your IRA for at least five years. You will still need to pay taxes on the withdrawn amount, unless you are withdrawing from a Roth IRA...

1. First Time Home Buyer -- You can make a one-time $10,000 withdrawal
to purchase your first home. Technically, the home does not need to be your first one ever. As long as you have not owned a home in the past two years, you are eligible for this exemption. If your spouse meets the criteria, he or she may also make a $10,000 withdrawal from her own IRA, for a total down payment of $20,000. You may also elect to use this exemption for the purchase of a home for your child, grandchild or parent. You must, however, spend the withdrawn amount on an eligible home purchase within 120 days of the withdrawal date.

2. Qualified Higher Education Expenses -- You can withdraw from your IRA without penalty to pay qualified educational expenses for yourself, your spouse, your child or your grandchild. The student must be currently enrolled in an accredited post-secondary educational program. Tuition and fees as well as books and supplies may be paid for with this money. Additionally, if the student is enrolled at least half-time, dorm fees also qualify. We suggest
you read what the IRS has published to understand when and what is OK …www.irs.ustreas.gov.

3. Non-reimbursed Medical Expenses -- If your medical bills exceed 7.5% of your adjusted gross income and are not otherwise reimbursed, you may withdraw funds from your IRA to pay those medical bills.

4. Permanent Disability of IRA owner -- If you become totally and permanently disabled, you are entitled to withdraw funds from your IRA without penalties. The determination of disability must be made by a qualified physician and pass a few IRS tests. You can find out more information at www.irs.gov.

5. Medical Insurance Premiums While Unemployed -- Should you lose your job, you can withdraw from your IRA without penalty in order to pay your medical insurance premiums. You must remain on unemployment for twelve weeks before this exemption will

6. Death of the IRA Holder -- If you should die prior to reaching your minimum distribution age, your beneficiary will not be subject to the 10% penalty on your IRA withdrawal. He or she will, however, be taxed on the income.

7. Back Taxes -- If you owe back taxes to the IRS and funds are withdrawn from your IRA due to a levy, you will not be charged the 10% penalty on those funds. The IRA must be the subject of a levy for this exemption to apply.

8. Turning 59 ½ -- As long as you have held the IRA for at least five years, you are entitled to make penalty free regular withdrawals beginning the day that you become 59 ½ years old.

9. 72(t) Exception -- Maybe the most commonly used early withdrawal technique amoung retirees is the 72(t) Exception. Under current law, you can escape the early withdrawal penalty if you take "substantially equal periodic payments". Do NOT do this without consulting a professional.
Yes, you could figure it out. The penalty for doing it wrong is that all the money you've taken out will be subject to the 10% penalty.

Here's how it works…

You must withdraw money at least once a year, and you must keep taking withdrawals for five years or until you reach age 59½, whichever is longer. The tricky part is the calculation of what you can take. That is the part we suggest you seek advice from a qualified tax professional. There are three methods. It is likely one will fit your needs best.

Filing For the Exemption
When you file your taxes, be sure to count the IRA withdrawal as income. You will also need to file Form 5329, which can be downloaded at www.irs.gov. You will be able to claim the exemption on that form. It is highly recommended that you speak with your tax professional to be sure that your tax return is in order.

There are times in life that you may find yourself unable
to make ends meet, particularly when facing high expenses such as medical bills or college expenses. It is recommended that you withdraw from your IRA only as a last resort. Should you need the funds, however, the above guidelines will help you better understand which situations qualify for an exemption. It is recommended that you speak with a tax professional prior to making your withdrawal to ensure that no costly errors are made.