Can I Take Money Out of My IRA Early?
IRA account holders may begin to withdraw monies starting at age 59 1/2 without penalty. It is the circumstances of the withdrawal that may invoke a 10 percent penalty if withdrawals are made improperly. Every investor should know and understand the code before making early withdrawals. All IRA withdrawals are still subject to federal, state and local taxes. However, there are IRS-approved exceptions to premature withdrawal or early redemption without penalty.
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Education Exemption
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The IRS has lenient and allowable rules for education expenses. The exemption extends to yourself, your spouse, children and even grandchildren. Withdrawal is allowed for post-secondary educational expenses. Institutions of education include colleges, vocational schools and universities. However, these institutions must be approved by the Internal Revenue Service. IRS-eligible institutions must already qualify for federal student aid programs. Most college expenses are eligible for the education expense if the individual is a full-time student.
Home Purchase
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First-time homeowners may also withdraw funds from their IRA accounts. There is a $10,000 limit per individual. Spouses may also use IRA funds, making a possible borrowing of $20,000 for married couples. Like the education allowance, the first-time homeowner can include the spouse, children, grandchildren or even an elderly parent related to the individual retirement account holder.
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Homeownership Rules
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The meaning of first-time homeowners is very generous. The exemption merely requires individuals not to have been homeowners for the previous two years. Funds taken from an individual retirement account must be utilized within 120 days after withdrawal. Failure to do so results in the withdrawn funds becoming a taxable event with the penalty enforced.
Hardship Withdrawals
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The Internal Revenue Service will allow penalty-free withdrawals for certain hardship and medical emergencies. Unemployed workers may withdraw from their individual retirement accounts to pay medical insurance premiums. In addition, withdrawals are also permissible for medical costs not reimbursed by insurance. Individuals found to be permanently disabled are immediately eligible for retirement account withdrawals.
Costs of Early Withdrawal
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Individual retirement accounts are meant to be withdrawn after retirement when your tax rate is presumably lower. Early withdrawal, while permissible, may result in raising you to a higher tax bracket. This is because while there is no penalty under the circumstances described above, regular income tax rates still apply. Adding a withdrawal amount to your existing income may have taxable consequences.
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