Ways to Withdraw from an IRA without Penalty
Times are tough for many of us. There may be times where we
find that we need additional cash and there are few options
that remain. While we understand that our 401(k)s and IRAs
are designed for creating retirement income, these accounts
may be the only source of a sizable amount of cash.
We should remember that any withdrawals from a tax-deferred
account before the age of 59 ½ are subject to both
ordinary income tax as well as a 10% early withdrawal
penalty. For individuals in higher income tax brackets,
this could result in losing half of the withdrawal to taxes.
Before contacting anyone to request that a check be cut and
mailed out, let's review the IRS-approved ways to withdraw
from your IRA penalty-free.
Buying a first home
First-time home buyers can pull up to $10,000 from an IRA to
buy or build a first home. If married and both spouses are
first-time home buyers, a combined $20,000 can be used.
This can be helpful for those who have saved some money but
may not yet have the 20% down payment required to eliminate
private mortgage insurance (PMI). A larger down payment
will also help reduce the monthly payment.
While it is not advisable to forgo retirement savings to
fully fund our children's college educations, IRA funds are
still an option for higher education expenses. These
expenses can include tuition, fees, books and supplies, and
room and board.
If more than 7.5% of income is being spent on unreimbursed
medical expenses, IRA money can be used to pay the excess.
It may be helpful to discuss this with a tax preparer or CPA
to make sure that the calculations are appropriately applied.
If an employee loses a job and gets unemployment benefits
for 12 consecutive weeks, an IRA can be used to pay medical
premiums. Trying to maintain a household on unemployment
income is enough of a challenge, and Cobra payments are
often higher than the required payments when employed.
If a disability restricts the ability to work before the age
of 59 ½, IRA distributions can be taken without
There are some restrictions for military personnel, but
soldiers can take a distribution while on active-duty if
they have been active for about 6 months.
If none of the above situations apply, there is one more
method. The IRS requires the account holder to take a
series of equal payments for a minimum of five years or to
age 59 ½, whichever is longer.
The payment amount is not randomly determined. It must be
calculated based on the account holder's lie expectancy with
an IRS-approved calculation method. Using the approved
method may end up providing a smaller payment amount than
the actual amount needed.
In addition, even if the payments are not needed for that
length of time, they must still be taken.
For some investors, these options provide a bit of comfort.
For others, they just confirm that there is no comfortable
way to get around the 10% penalty.
Regardless of the circumstance, we should carefully review
all options before making a decision so that we do what is
in the best interest of our household.
About the Author:
Ozeme J. Bonnette is a financial coach, speaker, and the
author of Get What Belongs to You: A Christian Guide to
Managing Your Finances. She began her career at Merrill
Lynch. She now teaches and speaks throughout the U.S. to
increase financial literacy. She earned 3 Bachelor's
degrees at Fresno State and an MBA at UCLA's Anderson
School. Find her at www.thechristianmoneycoach.com .