(Includes Traditional, SEP, and SIMPLE IRAs)
The contributions you make to your IRA are intended to supplement your income during your retirement years. However, as much as you would like to let your IRAs remain untouched until retirement, unforeseen expenses may force you to distribute some of those assets prematurely. Should you decide to take a distribution from your IRA, these amounts may be subject to federal and state taxes.
If you are younger than 59 ½...
If you take a distribution, you may be assessed an additional 10% early-distribution penalty on any taxable amount. The IRS imposes this penalty to deter individuals from taking premature distributions from their retirement accounts. The penalty may be waived for the following exceptions:
If you are unemployed for a period of consecutive 12 weeks, you may take penalty-free distributions from your IRA to pay for your health insurance (COBRA).
IRA distributions to pay for medical expenses that exceed 7.5 percent of their adjusted gross income.
First-Time Home Purchase
Distributions from an IRA of up to $10,000 to use towards the purchase of a home that qualifies as a first time home buyer. The IRS sees your home as a first-time home if you have not owned a home for the past two years. This $10,000 is a lifetime limit.
|Death or Disability||
Upon death or if a physician determines that, because of a mental or physical disability, you are unable to engage in any gainful employment, you are allowed to take penalty-free distributions from your IRA.
|Higher Level Education Expenses||
Any distributions that go towards any higher level education expenses for you, your child, your grandchild or your spouse's grandchild. There is no dollar limit for this exception.
|Inherited IRA Assets||
If you are the beneficiary of a deceased IRA holder, amounts distributed from the Inherited IRA are not subjected to early-distribution penalty.
Distributions taken the year after the death of the IRA holder are calculated based on the life expectancy of the beneficiary.
Arranging a stream of annual distributions under one of three IRS - pre-approved methods – must be taken until the IRA holder is either age 59½ or for five years, whichever comes later. This is referred to as taking substantially equal periodic payments (SEPPs) from your IRA.
The 10% penalty is waived for amounts withdrawn from your IRA as a result of an IRS levy. However, if you voluntarily withdraw the amount from your IRA to pay the taxes owed without an IRS levy, the distribution will be subject to an IRA penalty.
Distributions from 401(k) plans and IRAs are exempt from the early withdrawal penalty if rolled over into another eligible retirement plan within 60 days.
Rollovers of distributions from IRA are limited to one in a twelve-month period for Traditional, Roth, SEP and SIMPLE IRAs combined.
Qualified reservist distributions are not subject to the 10% penalty. Distributions may be repaid back to a retirement plan within 2 years from distribution.
|Qualified Birth or Adoption||
The SECURE Act of 2019 provides penalty-free withdrawals from retirement plans for any “birth or adoption distributions.” A couple can distribute up to $5,000 each (total of $10,000) from their retirement plans for birth or adoption expenses. The child’s name and tax identification number must appear on the individual’s tax return within 1 year of the birth or finalized adoption.
If you are older than 59½...
Once you reach age 59½, you can withdraw funds from your Traditional IRA without restrictions or penalties. But keep in mind that your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income.
If you are older than 70½...
Beginning in the year you turn 70½*, you must start taking an annual Required Minimum Distribution (RMD) from your Traditional IRA. If you don’t make withdrawals, you’ll have to pay a 50% penalty on the amount you should have withdrawn.
*Update from the SECURE Act of 2019: the age at which individuals need to start taking required minimum distributions has been extended to the year the IRA holder turns 72. However, individuals who turned age 70 ½ in 2019, will still need to take their first RMD by April 1, 2020.)