So, you need to tap into your IRA before you hit the magical age of 59 1/2? Understandable. Life happens, and sometimes you need those funds sooner rather than later. The good news is, you might not have to face that dreaded 10 percent early withdrawal penalty. Here’s a rundown of how to withdraw your IRA early and the 15 exceptions that can save your hard-earned cash from Uncle Sam’s grasp.
1. Substantially Equal Periodic Payments (SEPP)
Start here if you need a regular income stream from your IRA. The IRS-approved methods for calculating SEPP include:
- Required Minimum Distribution (RMD) method
- Fixed Amortization method
- Fixed Annuitization method
But beware: if you alter the payments or roll over the account within five years or before you turn 59 1/2, you’ll get hit with penalties. Consistency is key when figuring out how to withdraw your IRA early using SEPP.
2. Medical Expenses Over 7.5% of AGI
Got big medical bills? If they exceed 7.5% of your adjusted gross income (AGI), you can use your IRA funds penalty-free to cover the excess. This is a practical way to withdraw your IRA early without penalties.
3. Higher Education Expenses
Thinking of going back to school or funding your child’s education? Qualified higher education expenses can be covered without penalty, offering another method on how to withdraw your IRA early.
4. First-Time Home Purchase
Buying your first home? Withdraw up to $10,000 penalty-free. This applies to you, your spouse, your children, grandchildren, or even grandparents.
5. Birth or Adoption
Welcoming a new member to the family? Withdraw up to $5,000 penalty-free within one year of the birth or adoption.
6. Emergency Expenses
New as of 2024, you can withdraw up to $1,000 annually for emergency expenses. No more than once a year though – the IRS isn’t your piggy bank.
7. Disaster Recovery
If you’ve been affected by a federally declared disaster, you can withdraw up to $22,000 penalty-free.
8. Disability
If you’re deemed disabled and unable to work, you can access your IRA funds without penalty.
9. Long-Term Care
Starting in 2026, you can withdraw funds for qualified long-term care expenses without penalty.
10. Terminal Illness
If you’re diagnosed with a terminal illness, early withdrawals are penalty-free.
11. After Death
Withdrawals by your beneficiaries after your death are penalty-free. Just make sure they follow the rules to avoid unnecessary taxes.
12. Military Reservists
Called to active duty for at least 180 days? You can take penalty-free withdrawals.
13. Health Insurance Premiums During Unemployment
If you’ve received unemployment compensation for 12 consecutive weeks, you can withdraw funds to pay health insurance premiums penalty-free.
14. Domestic Abuse Victims
From 2024 onwards, victims of domestic abuse can withdraw up to $10,000 penalty-free.
15. IRS Levies
If the IRS levies your IRA to pay off tax debts, those withdrawals won’t incur a penalty. But if you withdraw to pay an IRS bill on your own, that’s a different story.
Bonus Tips for Roth IRAs
Roth IRAs are a bit different. You can usually withdraw your contributions (not the earnings) penalty-free. However, if you withdraw earnings before age 59 1/2, you’ll need to meet certain conditions to avoid penalties.
Final Thoughts on How to Withdraw Your IRA Early
Understanding how to withdraw your IRA early doesn’t have to be a financial disaster. By knowing these 15 exceptions, you can strategically manage your funds and avoid unnecessary penalties. But remember, always consult a tax professional before making any withdrawals. Stay smart and keep more of your money in your pocket – where it belongs.
Now, go forth and navigate your IRA like a pro. After all, you’ve earned it!