Exceptions to Early IRA Withdrawal Penalty

Alloy Silverstein’s Tax Tip of the Week

One guarantee in life is that it is unpredictable. If life has thrown you a financial curve ball, consider all of your options. Even though you may have been diligent in your retirement savings, there may come a time where you have to take money out of your Traditional IRA earlier than you had planned. Know that your early withdrawal will be taxed, and if you withdraw the funds prior to age 59½, you will be hit with a 10 percent early withdrawal penalty on the regular income tax you owe.

However, the tax law also includes a laundry list of instances that are excluded from an early withdrawal penalty.

Here are some of the more common exceptions that may be permitted:
 

• Medical Expenses. You can use early IRA distributions without facing the penalty, if you have medical expenses that are more than 10 percent of your adjusted gross income.
   
• Healthcare Insurance. If you are unemployed and use IRA distributions to pay for healthcare insurance, you can avoid the early withdrawal penalty. However, you must meet these additional requirements:

  • You received unemployment compensation for 12 consecutive weeks because you lost your job.
  • You received the IRA withdrawal in the year you received unemployment compensation or in the following year.
  • If you have been re-employed, you must not have taken the IRA distributions more than 60 days after you were newly employed.
• Disability. If you are disabled and have doctor’s verification that you are unable to work, you may qualify for an exemption.
   
• Qualified Higher Education Expenses. You can avoid the early withdrawal penalty if you use the IRA distributions for qualified higher education expenses for yourself, your spouse, your children, or grandchildren. Use caution, however, as the IRA distributions you receive are taxable income and may impact the student’s ability to qualify for financial aid.
   
• First-time Home Purchase. You may withdraw up to $10,000 from your IRA to build, buy, or rebuild a first home for yourself, your parent, your spouse, or your children or grandchildren, without being subject to the early withdrawal penalty. Further Reading: Tax Facts When You Buy a Home →
   
• Military service. Under certain conditions, members of the military can take early withdrawals and avoid the early withdrawal penalty.
   

 
What about Roth IRAs? Although withdrawals from a Roth IRA that has been in existence at least five years are completely tax-free after age 59½, earlier distributions are still taxable and subject to the 10 percent tax penalty, unless an exception applies.
 
Keep in mind that you may have to meet specific conditions to qualify for these exceptions. Involve your CPA or financial advisor in your financial planning and decision making process so that, even if you’re facing a curve ball now, you can continue to make progress in your long term goals. Please call if you have questions about your situation.
 

© MC 2017 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.