All these years you’ve been saving up, diligently funding your IRAs. But now you’ve got good reason to dip into those funds and are wondering whether it’s safe to do so. Distributions from traditional IRAs are taxable and if taken before reaching age 59 ½, they may also be subject to penalty. There are exceptions, however.
For example, if you’re a first-time homebuyer (meaning you didn’t own a principal residence at any time during the previous two years), up to $10,000 can be withdrawn without penalty. And your spouse can withdraw the same amount as well!
Paying for higher education is another common reason to withdraw IRA funds. When funds are used for tuition at an accredited college or vocational school, there’s no early withdrawal penalty, regardless of amount.
Distributions used to pay medical expenses aren’t subject to penalty either, but only the portion that exceeds 10% of your Adjusted Gross Income (AGI) is excluded. If you’re over age 65, the threshold is lowered to 7.5% of AGI.
Below are some other types of distributions from a traditional IRA not subject to an early withdrawal penalty:
- Distributions to pay for health insurance while unemployed, for some taxpayers.
- Distributions to military reservists on active duty for more than 179 days.
- Distributions to an employee over age 55, after the employee no longer works for the employer.
- Distributions made due to death.
- Distributions made due to a total and permanent disability.
- Distributions made due to an IRS levy being placed on the account, unless the funds were distributed to satisfy a different IRS levy on a different property.
There are other exceptions, so if you are contemplating taking an early distribution from your traditional IRA, contact us to see whether you qualify for an exception to the penalty.
For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, taxes (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.