7 Ways to Take Early IRA Withdrawals Without Penalty

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Generally, if a self-directed IRA owner takes an early distribution from a retirement account, meaning he/she withdraws money before reaching the age of 59 ½, the IRS will impose an additional tax penalty on any taxable  distribution. However, there are a few exceptions to this rule. 

The Penalty Tax

The IRS’ rule of thumb for early distributions is to impose a 10% penalty on any taxable funds being withdrawn. In the case of a tax-deferred account, that means the withdrawn funds not only be taxed as regular income, the amount distributed will have an additional 10% imposed on top of the income tax.

Exceptions

It is possible to take early distributions from your retirement account without penalty under the following circumstances:

1) Disability

In the case of total and permanent disability of the self-directed IRA owner, withdrawals from the retirement account will not be penalized.

2) Education

Funds will not be penalized if the IRA owner is using the early withdrawal to pay for qualified higher education expenses, such as tuition, text books, or university fees.

3) Medical Insurance While Unemployed

If you are unemployed for a period of 12 weeks or more and in need of continuing to pay healthcare insurance premiums , you can use retirement funds to cover this expense.

4) First Home Purchase

A self-directed IRA owner can withdraw up to $10,000 from a retirement account without penalty, as long as it goes toward the purchase of a new home. It must be the first home of the receipient of the distribution, and any withdrawal in excess of $10,000 will be penalized as normal.

5) Military

In certain cases, early withdrawals made by qualified military reservists whom are called to active duty will not be penalized.

Please consult your accountant or other tax professional before moving forward with an early withdrawal to make sure you understand if and how you will be penalized.

6) Medical Expenses

Distributions from an IRA paid towards the medical expenses above 10% of the taxpayer’s adjusted gross income are exempt from the early distribution penalty.

7) Death

After the death of an IRA holder, beneficiary distributions are always exempt from the arly distribution penalty.

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