Question: What are some of the other instances when you can withdraw money early from your IRA penalty free?

A BuyandHolder

Dear BuyandHolder,

Last week, we answered a question from a BuyandHolder about using money in his IRA to buy a house. We explained the circumstances under which taking money from an IRA for this purpose in some cases is free from the early withdrawal tax penalty. Click HERE to read.

Note: In most situations, tapping into your IRA before you turn 59½ triggers a 10% federal income tax penalty along with whatever penalties your state imposes. In addition to buying your first primary residence, here are some additional circumstances in which you won’t be hit with the 10% early withdrawal penalty.

Money for college

You can take penalty-free withdrawals from an IRA to pay for qualified college expenses for a family member. That could be you, your spouse, your children, or your grandchildren. Qualified expenses include tuition, books and supplies. And, if the student is enrolled at least half time, then bills for room and board also fall under the qualified expense category.

Money for retirement

You can also avoid the early withdrawal penalty by using the "substantially equal periodic payments" rule. This is an annuitizing strategy. You must agree to withdraw a specific amount of money for five years or until you turn 59½, whichever is longer. The amount is based on your life expectancy as predicted by the IRS. The amount cannot be changed nor can you stop the withdrawals once you begin, even if you’re facing financial problems.

Money for health insurance

If you’ve been laid off, you can take penalty-free withdrawals to pay your health insurance premiums. However, you must have received unemployment benefits for at least 12 consecutive weeks to qualify.

This ruling also applies to premiums paid under COBRA, the federal law that allows you to continue your former employer's coverage a number of months.

TIP: Whether or not you’re unemployed, if your unreimbursed medical payments are more than 7.5% of your adjusted gross income, you can tap into your IRA.

Money to replace salary

If you are disabled, you are entitled to make penalty free withdrawals. However, a physician must determine that because of a mental or physical disability you are absolutely unable to work. In addition, the disability must be one that is expected to result in your death or last for an indefinite period. Your IRA custodian can tell you if your plan requires certification from a doctor – most do.

Bottom line: While it’s potentially helpful to many that the IRS has made these exceptions, tapping into your tax-sheltered IRA should be viewed as a last resort.  

For More Information

Check the IRS website at: www.irs.gov

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