For Mark Roberts’ Use: When you decided to make certain tax-deferred retirement investments, you were likely informed of the penalties you could face by withdrawing the funds before age 59 ½. Generally, taking this action will result in a 10 percent federal income tax penalty. However, in certain situations you may be allowed to make early withdrawals from retirement accounts while avoiding the penalty.
There are different exceptions detailed for IRAs and employer-sponsored retirement plans, but the regulations are similar in many ways.
Death of an IRA owner. If you die at age 59 ½ or sooner, your beneficiaries can take distributions from your account, subject to annual required minimum distributions.
Disability. You may begin to withdraw funds without the 10 percent federal income tax penalty, if you are disabled. Certain conditions apply, depending upon the type of account.
Medical Insurance. If you lose your job or begin receiving unemployment benefits, you can withdraw IRA funds to pay for health insurance.
Medical care. Under employer-sponsored plans, you can withdraw the amount allowable as a medical expense deduction. Under IRAs, you can withdraw any amount you paid for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income for the year. If you’re over 65, you can withdraw medical expenses that exceed 7.5 percent of AGI.
Part of a Substantially Equal Periodic Payment SEPP plan. You may receive a series of substantially equal payments over either your life expectancy, or the combined life expectancy of yourself and a beneficiary. You must take payments over a period of five years or until you reach age 59 ½, whichever is longer, and you must use one of three payment schedules determined by the federal government. If you change the payment schedule after beginning distributions, you can be subject to the 10 percent penalty.
College tuition. You may withdraw IRA funds to cover higher education expenses for either yourself or dependents.
First home purchase. IRAs allow for a one-time withdrawal of up to 10,000 dollars in order to purchase a home.
Reduce excess contributions. If you or your employer made contributions to an employer-sponsored plan that went over the limit, you’re allowed to withdraw that amount without penalty.
Reduce excess elective deferrals. If you elected to defer an amount over the allowable limit, you can withdraw that amount from your employer-sponsored plan.
Qualified Domestic Relations Order (QDRO). This is a payment made from your employer-sponsored plan to an alternate payee under a QDRO.
