Traditional IRA Hardship Rules
The traditional individual retirement account (IRA) was first written into law in 1974 to give people an incentive to save for retirement. Most contributions to traditional IRAs are tax-deductible and grow tax free until retirement. In order to prevent people from using these accounts for purposes other than saving for retirement, a penalty is applied to withdrawals before retirement. However, there were several exceptions that were written in to allow money to be withdrawn without having to pay the penalty.
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Qualified Withdrawals and Penalties
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The IRS defines retirement age as 59 1/2 years old so any withdrawal from a traditional IRA after this age is penalty free. If you take money out of your account before this age, you must pay a 10 percent penalty in addition to any other applicable taxes on the withdrawal.
Death or Disability
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If the account owner of a traditional IRA dies, the beneficiary or beneficiaries of the account may withdraw the money tax-free. If the account owner becomes permanently disabled, the money in the account can also be taken out. This waiver does not apply to temporary disabilities that the account holder may recover from. However, if there are significant medical expenses related to a temporary disability, a withdraw may qualify for an exemption from the penalty based on excessive medical expenses.
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Medical Expenses
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If you have significant medical expenses in any tax year, you may be able to withdraw money from your traditional IRA to help cover those costs. The IRS defines significant medical expenses as those that exceed 7.5 percent of your adjusted gross income. For example, if you have an adjusted gross income of $70,000, your medical expenses must exceed $5,250 for the exemption to kick in. You may only withdraw enough to cover expenses above the 7.5 percent threshold. For example, if your medical expenses totaled $8,250, you could withdraw $3,000 from your IRA penalty free.
Educational Expenses
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If you have qualified higher educational expenses, you may withdraw enough money from your traditional IRA to meet those expenses. Qualified educational expenses include tuition and required supplies at any qualified educational institution, and if you are attending at least half-time you can also include room and board as a qualified expense.
First Time Home Buyers
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If you are a first-time home buyer, you can withdraw up to $10,000 to cover the costs of buying, constructing, or repairing your first house or apartment. This limit is per person so if you are married you could each withdraw up to $10,000 penalty-free.
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