The list of these options has grown.
Provided by Bob Medler, AIF®, CRPC®, CMFC®
LPL Wealth Advisor | Investment Analyst
An IRA, or Individual Retirement Account, is a tax-advantaged savings account that is subject to special rules regarding contributions and withdrawals. One of the central rules of IRAs is that withdrawals prior to age 59½ are generally subject to a tax penalty because policymakers sought to create a disincentive to use these savings for anything other than retirement.1
Yet, policymakers acknowledged that extenuating circumstances might require access to these savings prior to one’s second act. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.
Penalty-Free Withdrawals. Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.1
Death – If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into their IRA, they will forfeit this exception.
Disability – Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.
Substantially Equal Periodic Payments – You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.
Home Purchase – You may withdraw up to $10,000 toward the purchase of your first home ($20,000 for a married couple). You cannot have owned a home within the last two years.
Unreimbursed Medical Expenses – This exception covers medical expenses in excess of 10% of your adjusted gross income.
Health Insurance – After a job loss, there are rules in place that allow the purchasing of health insurance, penalty free.
Higher-Education Expenses – Funds may be used to cover higher-education expenses, such as tuition, student fees, textbooks, supplies, and equipment. Only certain institutions and associated expenses are permitted.
Active Duty Call-Up – Reservists who make an IRA withdrawal during a period of active duty of 180 days or longer do not have to pay a 10% early withdrawal penalty.2,3,4
As always, be sure to speak with a tax professional about your specific situation.
Robert Medler is a Registered Representative with and, securities are offered through LPL Financial, Member FINRA/SIPC CA Insurance License # 0C05523
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.
1 – https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14 [6/14/18]
2 – https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp [2/21/18]
3 – https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty [11/7/18]
4 – https://www.investopedia.com/articles/retirement/02/112602.asp [10/7/18]