Buying Your First Home
Purchasing a first home is a life-altering event that may warrant the use of IRA funds. The IRS offers a boon to first-time homebuyers through a penalty-free withdrawal from an IRA of up to $10,000 for qualified acquisition costs, which include buying, building or rebuilding a home, as well as any usual or reasonable settlement, financing or other closing costs. Remember, this is a lifetime limit, and the funds must be used within 120 days of withdrawal.
Medical Expenses
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI) for the year can lead to a penalty-free withdrawal from an IRA. For example, if your AGI is $100,000, only medical expenses exceeding $7,500 could be considered.
IRS Levy
An early withdrawal due to an IRS levy is exempt from the 10% penalty, as these funds are used to satisfy the tax debt. The process involves the IRS providing written notice of the impending levy and then, if the debt is not resolved, seizing assets including IRA funds.
Substantially Equal Periodic Payments (SEPP)
The establishment of substantially equal periodic payments (SEPP) allows individuals to withdraw funds from their IRA without penalty by setting up a series of substantially equal payments based on their life expectancy or the joint life expectancies of themselves and their designated beneficiary.
Unemployed Health Insurance
Individuals who are receiving unemployment benefits and use IRA funds to pay for health insurance premiums also may be exempt from the early withdrawal penalty. However, the person must be unemployed for 12 weeks and receive their benefits in the same year the early withdrawal is taken.
Disaster Recovery
Victims of federally declared disasters may access up to $22,000 in IRA funds without penalties to aid in disaster recovery efforts. This exception aims to provide financial relief to those affected by natural disasters such as hurricanes, wildfires, or floods.
Death
Beneficiaries of an IRA are exempt from the 10% early withdrawal penalty, with spouses having the option to transfer the funds into their own IRA, while non-spouse beneficiaries must follow specific IRS distribution rules based on the decedent’s age and the beneficiary’s relationship to the decedent.
Returned IRA Contributions
If you’ve contributed more to your IRA than allowed, the excess contributions can be withdrawn without penalty by the tax filing deadline (including extensions) of the following year, as long as the tax return has not been filed. However, this exception does not apply to the earnings of excess contirbutions.
Military Reservists
Members of the military reserve who are called to active duty for at least 180 days may be eligible to withdraw funds from their IRA penalty-free. This provision honors the service and sacrifices of military personnel and their families, providing access to funds when needed most. However, reservists who take advantage of this exception may not make new contributions to their plan for at least six months following the early withdrawal.
Can I Make an Early Withdrawal After Losing My Job?
An employee leaves her office after being laid off from her company.
If you’re transitioning between jobs, you may be wondering whether you can withdraw from your IRA without penalty. The IRS does not classify job separation as an exception to the early withdrawal penalty rules for IRAs. Therefore, if you choose to make a withdrawal, you should weigh the potential costs against your immediate financial needs before proceeding with an early withdrawal from your IRA.
Making this financial move requires a clear understanding of both the immediate and long-term consequences that could arise from tapping into your retirement savings prematurely. In the long term, early withdrawals can significantly impact the growth of your retirement savings due to the loss of compounding interest.
Bottom Line
While IRAs are designed to secure financial stability in retirement, understanding the various exceptions to the early withdrawal penalty is critical for managing unforeseen financial needs without undermining your long-term savings. Whether it’s due to disability, education expenses, a first home purchase, or any of the other specific exceptions outlined by the IRS, knowing these regulations can help you make informed decisions that can protect your nest egg.
Retirement Planning Tips
Required minimum distributions (RMDs) are mandatory withdrawals you must take from tax-deferred accounts, starting at age 73. These distributions will raise your taxable income for the year, increase your tax liability and potentially propel you into a higher tax bracket. That’s why it’s important to plan for them. Luckily, SmartAsset has a tool designed to help you calculate how much your RMDs could be.
Don’t forget to account for Social Security benefits as you plan for retirement. SmartAsset’s Social Security calculator can help you estimate how much you may be eligible to receive based on your earnings and age at which you plan to claim your benefit.
A financial advisor can help you invest your retirement savings and even manage your IRA for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
