Can I Avoid Penalties on IRA Withdrawals?

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IRA withdrawals can trigger penalties.

You have an IRA.

Perhaps you have more than one.

You have signifiant assets tied up in these accounts.

Can you access and use this money?

According to a recent Investopedia article titled “9 Penalty-Free IRA Withdrawals,” the answer is not so simple.

IRA withdrawals can incur penalties.
There are a number of ways to make IRA withdrawals.

How so?

Making IRA withdrawals make bring about a 10 percent penalty if taken too soon, before age 59 1/2.

There are some ways to use these withdrawals without incurring penalties.

What are they?

Unreimbursed Medical Expenses.

Maybe you do not have medical insurance.

Perhaps you simply have health care expenses not covered by insurance.

There is a chance you could take penalty-free distribution to pay for the medical expenses.

If so, you must make withdrawal and pay for the medical expense in the same calendar year.

Also, the unreimbursed medical expense must be greater than 10 percent of your adjusted gross income.

Health Insurance Premiums During Unemployment.

Let us say you are unemployed.

You still need to pay for health insurance premiums.

To do this with IRA withdrawals, you need to meet specific criteria.

What are they?

  • You will need to have lost your job.
  • You must have received unemployment compensation for 12 consecutive weeks.
  • The distributions must have been taken during the year or the year after you received unemployment compensations.
  • Your distribution was received no later than 60 days after you returned to work.

Permanent Disability.

You are no longer able to work because of an irreversible disability.

By providing evidence of the disability to your plan administrator, you may withdraw money for any propose without triggering a penalty.

Higher-Education Expenses.

If you pay a qualified educational expense for yourself, child or spouse, you may be able to avoid a penalty when using IRA withdrawals.

What are qualified expenses?

These include books, fees, tuition, supplies, and equipment required for enrollment.

If students are enrolled at least half-time, distributions may also cover room and board.

An Inherited IRA.

You were listed as the beneficiary for an IRA.

You can take penalty free withdrawals.

How?

If you are the spouse of the original account owner and the sole beneficiary.

On the other hand, what if you elect to take a spousal transfer and roll the funds into your own non-inherited IRA?

In that case, the IRA functions as if it were your own.

This means the penalties are still applicable.

To Buy, Build, or Rebuild a Home.

You have an option to take your lifetime limit of $10,000 from your IRA without a penalty to build, rebuild, or purchase a home.

You much be a “first time” home buyer to qualify.

This technically means you could not have owned a home for the previous two years.

Because of this, you could previously have been a homeowner and still be considered a first-time home buyer at present.

If you are married, your spouse could take an additional $10,000 out from his or her IRA.

If you have other family members who fall under the first-time homeowner criteria, you can use the withdrawal to assist them.

Substantially Equal Periodic Payments.

The IRS may allow you to make regular withdrawals from your IRA for several years if you meet certain requirements.

You can do so under one of three methods already pre-approved by the IRS.

Withdrawals are taken each year for five years or until you tern 59 ½.

An IRS Levy.

Do you have an unpaid federal tax bill?

The IRS can take money directly from your IRA to pay the bill.

If the IRS levies it directly, the penalty will not apply.

Oh, boy.

What a deal.

Active Duty.

Qualified reservist distributions do not trigger the 10 percent penalty.

You may be able to pay back distributions even if the repayment contributions exceed an annual contribution limit.

This must be done within two years of your active duty services.

Final Thoughts.

Although these methods may protect you from penalties associated with IRA withdrawals, you may still be required to pay state or local tax.

You may be required to file IRS From 5329 with your income tax return.

Even so, taxes alone are far less than taxes and IRA withdrawals penalties combined.

Reference: Investopedia (Jan. 20, 2020) “9 Penalty-Free IRA Withdrawals”

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