How to Draw Out an IRA Without a Penalty
Though individual retirement accounts (IRAs) are meant to help you save for your golden years, you can withdraw IRA funds early to help meet certain expenses. If you qualify for an exception, the good news is that you'll avoid the 10 percent penalty the IRS charges people who take unqualified withdrawals, also known as distributions. However, you'll also be robbing yourself of tax-sheltered investments--so make sure you explore all your options before taking the plunge.
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Instructions
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Qualify for a Penalty Exception
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Withdraw up to $10,000 in IRA funds to put a down payment on your first house. If you have a traditional IRA, the distribution will be subject to income taxes. If you have a Roth IRA, the money is tax-free as long as you've had the account for at least five years.
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Use the IRA funds to pay for tuition or other qualifying education expenses incurred by you or anyone else in your immediate family. Again, you may owe income taxes if you take the money from a Roth IRA account that's been open less than five years--but at least you'll avoid the 10 percent penalty.
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Pay for medical bills that exceed 7.5 percent of your income with an early IRA distribution, as well as health insurance for you and your family if you have been out of work for 12 weeks or more. You can also qualify for early distributions if you become disabled because of a long-term mental or physical condition.
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Withdraw contributions you made to a Roth IRA without paying either taxes or penalties. Remember, you can only withdraw the contributions without penalty--any money the account earned may be subject to both income taxes and the 10 percent penalty.
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Get your money in substantially equal periodic payments. If you go this route, the IRS will calculate how much longer you are likely to live, then give you a fraction of your money each year. For instance, if you were expected to live another 30 years, the IRS would let you take 1/30 of your IRA holdings annually until you turn 59 1/2.
Report the IRA Distribution to the IRS
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Check with your IRA custodian, the institution that manages your IRA, to see if your particular IRA penalty exception will be reported on the IRS information return, Form 1099-R.
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File Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," if your 1099-R does not report distribution codes 2, 3 or 4 in the appropriate box.
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Attach Form 1099-R and Form 5329, if applicable, to your 1040 when filing your tax returns.
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References
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