Exceptions to Early IRA Withdrawal Penalties

Everyone knows how useful an Individual Retirement Account (IRA) is, but many people avoid it because of the penalties assessed with early withdrawals.  However, these people also don’t know about the exceptions to these rules.

The penalties are there so you don’t dip into your retirement savings unless you absolutely have to.  The government wants you to save as much as you can so that you’re as best prepare for your golden years that you can be.  However, they also know there are times when you have no other choice but to take distributions from your IRA.

One of the more widely used exceptions is that for disability.  If you become disabled and are unable to work, the IRS will allow penalty-free distributions.  Take note that there is a process to qualify, so make sure you do before withdrawing from your IRA.

Secondly, there is an exception on the amount of health care costs above the 7.5 percent adjusted gross income threshold.  If you suffer a serious injury or illness, you may get penalty-free withdrawals.

Next, if you become unemployed, you may use your IRA to make health insurance payments after you out of work for more than 12 weeks.

Payments made to family members to pay for higher education are also exempt from early withdrawal penalties.

A more complicated exception is called the 72(t) or SEPP.  This allows an early retiree to take equal and periodic distributions.  Once the 72(t) distribution is started it cannot be stopped.  Qualifiers must take the same amount for five years or until age 59 1/2, whichever is longer. “This can create problems for people who retire early. The combination of poor markets and distributions can endanger long-term income possibilities, so be very careful when considering the 72(t)”, says Tom and John Mills in an article here.

Other exceptions include beneficiary withdrawals and money taken by an IRS levy.

It’s best to talk to a financial advisor before withdrawing from your IRA before you are age 59 1/2 to see if you can take penalty-free withdrawals.  The experts at the IRA Financial Group are here to answer any questions you have.

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