10 Ways To Avoid IRA Penalties When Taking Money From Your IRA
10/11/201810 Ways to avoid IRS Penalties when taking money from your IRA
No matter where your IRA assets come from: inheritance, rollover from a 401(k) or other employer plan, or you started yours from scratch, there are IRS rules that govern how and when your withdrawals can be taken. If you withdraw money from your IRA before age 59 ½, you will usually have to pay a 10% early withdrawal penalty in addition to income tax on the distribution. However, there are ways to avoid these penalties if you satisfy certain criteria:
1. Withdrawing money to pay for qualified higher education expenses for you, your children or grandchildren. Keep in mind you will still owe income taxes on the amount withdrawn from your traditional IRA.
2. You can withdraw contributions from your Roth IRA at any age penalty and income tax free. When you get into your gains, then taxes and penalties will apply if you are younger than 59 ½.
3. If you inherit an IRA from your spouse, you have two options: roll into a beneficiary designated IRA in which case you can take penalty free withdrawals at any age, or you can roll your deceased spouses IRA into your own, then you are subject to the pre-59 ½ penalties.
4. If you are a non-spouse beneficiary inheriting an IRA you must take the money out one of the following three ways: lump sum, this is the least desirable option for tax purposes, 5-year drawdown account must be exhausted by the end of the fifth year, lifetime payments based on your life expectancy.
5. First time homebuyers may withdraw up to $10,000 ($20,000 for couples) penalty free for qualified expenses.
6. You can use IRA distributions to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income without incurring the early withdrawal penalty. The distribution must be in the same year as expenses.
7. If you become disabled and can’t work you can access your IRA without penalty. Keep in mind, a physician will have to verify that your disability will be indefinite or long term.
8. Distributions can be taken penalty free to pay for health insurance for you, your spouse and or children, provided you are unemployed for 12 consecutive weeks.
9. For IRA owners who are retiring early and want to tap into their IRA before they turn 59 ½, IRS rule 72t allows them to take substantially equal periodic payments and avoid the 10% penalty. This amount will be calculated based on the owners life expectancy using an IRS approved formula. These payments must occur over the span of five years or until the owner reaches 59½, whichever period is longer.
10. The best way to avoid penalties is to Wait until you are 59 ½ or older. IRA assets are meant to subsidize your income when you retire. If at all possible avoid tapping into these funds for other reasons.
This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, We recommend that you consult with a qualified tax advisor or CPA.
For more information please refer to the IRS website below.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
Mike Wiginton, CFA
President
H.L. Wiginton Capital Management
(205) 384-4402
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be appropriate for all investors. Steward Partners recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Wealth Manager. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
When Steward Partners Investment Solutions LLC, its affiliates and Steward Partners Wealth Managers provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account. Steward Partners is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Steward Partners provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Steward Partners will not be considered a “fiduciary” under ERISA and/or the Code. Tax laws are complex and subject to change. Steward Partners does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
No matter where your IRA assets come from: inheritance, rollover from a 401(k) or other employer plan, or you started yours from scratch, there are IRS rules that govern how and when your withdrawals can be taken. If you withdraw money from your IRA before age 59 ½, you will usually have to pay a 10% early withdrawal penalty in addition to income tax on the distribution. However, there are ways to avoid these penalties if you satisfy certain criteria:
1. Withdrawing money to pay for qualified higher education expenses for you, your children or grandchildren. Keep in mind you will still owe income taxes on the amount withdrawn from your traditional IRA.
2. You can withdraw contributions from your Roth IRA at any age penalty and income tax free. When you get into your gains, then taxes and penalties will apply if you are younger than 59 ½.
3. If you inherit an IRA from your spouse, you have two options: roll into a beneficiary designated IRA in which case you can take penalty free withdrawals at any age, or you can roll your deceased spouses IRA into your own, then you are subject to the pre-59 ½ penalties.
4. If you are a non-spouse beneficiary inheriting an IRA you must take the money out one of the following three ways: lump sum, this is the least desirable option for tax purposes, 5-year drawdown account must be exhausted by the end of the fifth year, lifetime payments based on your life expectancy.
5. First time homebuyers may withdraw up to $10,000 ($20,000 for couples) penalty free for qualified expenses.
6. You can use IRA distributions to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income without incurring the early withdrawal penalty. The distribution must be in the same year as expenses.
7. If you become disabled and can’t work you can access your IRA without penalty. Keep in mind, a physician will have to verify that your disability will be indefinite or long term.
8. Distributions can be taken penalty free to pay for health insurance for you, your spouse and or children, provided you are unemployed for 12 consecutive weeks.
9. For IRA owners who are retiring early and want to tap into their IRA before they turn 59 ½, IRS rule 72t allows them to take substantially equal periodic payments and avoid the 10% penalty. This amount will be calculated based on the owners life expectancy using an IRS approved formula. These payments must occur over the span of five years or until the owner reaches 59½, whichever period is longer.
10. The best way to avoid penalties is to Wait until you are 59 ½ or older. IRA assets are meant to subsidize your income when you retire. If at all possible avoid tapping into these funds for other reasons.
This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, We recommend that you consult with a qualified tax advisor or CPA.
For more information please refer to the IRS website below.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
Mike Wiginton, CFA
President
H.L. Wiginton Capital Management
(205) 384-4402
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be appropriate for all investors. Steward Partners recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Wealth Manager. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
When Steward Partners Investment Solutions LLC, its affiliates and Steward Partners Wealth Managers provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account. Steward Partners is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Steward Partners provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Steward Partners will not be considered a “fiduciary” under ERISA and/or the Code. Tax laws are complex and subject to change. Steward Partners does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.