Can I Withdraw From an IRA Without a Penalty?

23
August

An individual retirement account (IRA) is a tax deferred savings account established to help people save some of their earned income. Taxation of the savings is deferred until the funds are withdrawn. IRA rules state that any withdrawal before the account holder reaches age 59 1/2 will incur a 10 percent penalty tax in addition to the regular tax on the withdrawal. There are exceptions to this rule to allow for special circumstances and to help account holders with some forms of financial hardship.

Withdrawal of the current tax year’s contribution can be done without penalty if it is withdrawn before the due date for the tax return. The contributions with their net earnings can be withdrawn as long as the deduction for the contributions was not applied on the tax return. The IRA custodian will determine the net income to be included with the contribution. If the IRA had a loss for the year there will be a negative net income amount.

People who become disabled before the age of 59 1/2 do not have to pay the 10 percent penalty. The IRS defines disability as the inability to perform substantial gainful activity, which is the same definition Social Security uses. The disability will either result in death or last for at least 12 months. A doctor’s statement verifying this should be furnished with the tax return.

The costs of purchasing a home for a first time home buyer are not subject to the early withdrawal penalty. The IRS defines a first time home buyer as an individual who had no ownership interest in a home for the 24 month period prior to the purchase of the home which is being funded with the IRA withdrawals. For married people, both husband and wife need to meet the definition of first time home buyer. The IRS limits the penalty-free withdrawals to $10,000.00 for an individual. Married couples can each withdraw $10,000.00.

Individuals who lose their jobs do not have to pay the 10 percent penalty if it is used to purchase medical insurance. The individual needs to have received either state or federal unemployment insurance benefits for 12 consecutive weeks. The withdrawal must be done in the year the unemployment benefits were received or the next year. The IRS also requires taxpayers to receive the withdrawal within 60 days of starting another job.

The early withdrawal penalty does not apply to payments made to cover costs of higher education. The payments can be made for the taxpayer or the spouse, their children or grandchildren. Any expenses paid by an employer, pell grants, tax free scholarships and fellowships or Veterans educational benefits cannot be used for this exemption. The IRS considers any institution of higher learning qualified for this exemption if the institution is eligible for funds from the Department of Education.

Taxpayers who set up annuity payments from their IRA do not pay the early withdrawal penalty. The payments must be based on the account holder’s life expectancy or a joint life expectancy of the taxpayer and the spouse. The payments must be made at least once a year until the IRA is paid out or the account holder dies.

People who inherit an IRA from anyone who dies before age 59 1/2 can receive the assets without a penalty. If the beneficiary is the spouse of the IRA owner and treats it as his/her own IRA could receive the penalty if they take distributions before 59 1/2. The IRS considers contributions to the inherited IRA as a sign the spouse considers the IRA as their own IRA.

People who receive IRA distributions as the result of a qualified domestic relations order (qdro) do not receive the penalty. These orders are usually part of the distribution of marital assets in a divorce.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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