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Getting Money Out Of An IRA

How To Withdraw Money From An IRA Without Penalty

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Withdrawals made after age 59 1/2 are not subject to a penalty.

You can make a withdrawal from an IRA before age 59 1/2 without incurring a penalty in any of the following circumstances:

  • You are "disabled" as defined by the Internal Revenue Service.
    • According to the IRS, you are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long continued and indefinite duration.
  • The amount you withdraw is no more than the cost of your medical insurance for the tax year in question. All of the following must also be true:
    • You lost your job.
    • You received unemployment for 12 consecutive weeks (or would have if you weren't self-employed).
    • You made the withdrawals during either the year you received the unemployment compensation or the following year.
    • You made the withdrawals no later than a total of 60 days after you have been reemployed.
  • You have deductible medical expenses not reimbursed by insurance and in excess of the treshhold. (The threshold for the itemized deduction for unreimbursed medical expenses is 10% of the taxpayer’s Adjusted Gross Income (AGI). However, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the threshold is 7.5% of AGI. In 2017 the 10% threshold will apply to all taxpayers.) For purposes of illustration, we will use 7.5% of your adjusted gross income as the threshold:
    • If this exception applies to you, you can withdraw an amount up to the excess medical expenses without incurring penalties. To use this exception, pay the bills the same year.
    • For example, Ian had an adjusted gross income of $30,000 and unreimbursed medical expenses of $5,000. To determine how much he can withdraw from his traditional IRA without paying penalties, you would first multiply $30,000 by 7.5%, getting $2,250. Ian's medical expenses were $5,000. The difference between his medical expenses and 7.5% of his AGI is $2,750 ($5,000 - $2,250). So Ian can withdraw $2,750 without penalty. Keep in mind that like all withdrawals from a traditional IRA, this withdrawal is still subject to income taxes.
    • NOTE: You cannot take money from an IRA for medical reasons if your IRA is being used for periodic payments. If you are in this situation, consider splitting your IRA into two IRAs. Withdraw the money for medical expenses from the IRA which does not have periodic payments.
    • As noted above, if you are older than age 59 1/2, there is no 10% penalty, but you will have to pay taxes on the amount you withdraw.
  • You elect to take equal periodic payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary.
    • This is also known as "substantially equal periodic payments" (SEPP) or as "annuitizing" your IRA. Life expectancies are based on IRS tables - not your individual circumstances. The IRS tables include three ways to calculate payments. The most popular method is the "amortization method" because it usually provides the highest payment.
    • Once you start receiving withdrawals under the SEPP method,  you must continue with the method in order to avoid paying a 10% penalty on the withdrawals.. You can only change the life expectancy withdrawal method without penalty if you receive 5 annual payments and become disabled or reach age 59 1/2. Of course, all withdrawals are likely subject to income taxes.
    • On the other hand, if you stop making withdrawals before reaching the described benchmark, you will be subjected to the 10% penalty plus interest on all prior withdrawals.
    • If you want to find out your life expectancy for these purposes (not your real life expectancy mind you), look at IRS Publication 590 available at: http://www.irs.gov/pub/irs-pdf/p590.pdf offsite link.  If you want to start by determining the amount you want each year, you can use the calculator at www.72t.net offsite link which will tell you the amount of assets you need in an account to get the number you want. (Click on "calculators", then "SEPP calculators," then "SEPP Reverse Calculator."
    • To see how much you can take, use the 72(t) calculator at Bankrate.com.  Go to www.bankrate.com offsite link, click on "Calculators," then click on the Retirement tab. Look for the link to the 72(t) calculator).
    • NOTE: The rules regarding this type of withdrawal are complex. If you make a mistake, it could be costly.
  • You have qualified higher education expenses at an eligible educational institution.
    • "Qualified higher education expenses" include tuition, fees, books, supplies and equipment for the enrollment and attendance of a student at an eligible educational institution.
    • In addition, if the student is at least half-time, room and board will also be considered qualified expenses.
    • For these purposes, the student could be you, your spouse, child or grandchild.
    • The term "eligible educational institution" includes any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. The institution should be able to tell you if it is eligible.
    • NOTE: The amount that you can take from you IRA for this reason cannot be more than the qualified expenses.
  • You use the distributions to buy, build, or rebuild a first home, including a cooperative or condominium.
    • The maximum amount that will be free of penalties in this case is $10,000. The term "first-time homebuyer" for these purposes only means that you did not own a home at any time during the previous two years.
  • You, as a nonparticipant in the plan, receive a distribution under a qualified domestic relations order.
  • A taxable IRA distribution is transferred directly to your Health Savings Account (HSA).
    • You can make this election only once a year. The dollar amount excluded from your income cannot exceed the annual limitation of your HSA contribution for the year.
    • You will lose this exclusion if you cease to be eligible to contribute to your HSA during the 12 months after you make this contribution. In that case, you'll owe income taxes and the 10% penalty.
  • Money you put into to the  during a calendar year can be withdrawn before the end of the year without tax or penalty if:
    • You did not deduct the amount on a tax return.
    • You withdraw the interest or other earnings earned on the money. You can take losses into account.

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