Withdrawing Your Traditional IRA Funds
An important age to remember is 59 1/2 years in regard to your IRA.
Why? Because, if you haven’t yet reached that magic age and you withdraw IRA monies. The IRS will charge you a 10% penalty on the amount you withdraw and income taxes on the withdrawn amount. However, in certain circumstances, you can withdraw IRA funds early without a penalty.
Exceptions to the Withdrawal Penalty Rule
- Active military reservists. Active military reservists can withdraw from their Traditional IRAs without penalty at any age. Meeting specific conditions is necessary to qualify for this exception. Including that, you must be serving active duty at the time you make the withdrawal.
- Education costs. If you’re paying for education-related costs for yourself, your children, grandchildren, or your spouse. You can withdraw your traditional IRA funds early without penalty.
- Ensure you check the IRS’s rules about this exception, as the school attended must meet their mandated requirements.
- A first home purchase. You can use up to $10,000 of your IRA funds without penalty if you use the money to help purchase your first home. If married, the spouse can withdraw $10,000 from their own account as well.
- Technically, you could have owned a home before purchasing the home you’re hoping to use your IRA funds for. However, you can’t have owned or lived in a home you owned for 2 years prior to the time you’re using the funds to buy a house.
- If your spouse owns the home you live in. You can’t tap into your IRA funds without penalty for a home purchase.
- Using the funds within 120 days of obtaining them is a requirement.
- You can use your IRA money as a down payment on a home for your children, grandchildren, or spouse, as well as yourself.
- Other qualifying events. You may also withdraw from your IRA without a penalty if certain events occur:
- If you become totally disabled, your IRA money is available to you without penalty.
- Individuals who are not employed can actively withdraw from their IRA to pay for medical insurance payments.
- If you’re the beneficiary of the IRA and the IRA holder dies, you can receive IRA payments.
- Also, if you have unexpected, “excessive” medical bills, you can access your traditional IRA money to pay them.
Withdrawing IRA money for these reasons will require completing IRS Form 5329 to inform them about the withdrawal. Paying taxes on the amount withdrawn is still necessary, despite the 10% penalty not applying in these cases.
When You’re Required to Withdraw Your IRA Funds
By April 1st of the year, you turn 70 ½ years old, and it’s required that you begin to pull out your IRA money. The IRA has required minimum distributions (also known as RMDs). Not withdrawing your funds by age 70 1/2 will result in significant annual taxes from the IRS.
Ensure you know when and how to withdraw your traditional IRA funds without penalty. Effectively managing your money as you approach your retirement will make the difference between good and great golden years.