4 IRA Withdrawals that Actually make Sense

Withdrawing funds from a traditional IRA before a person turns 59 ½ usually means that they’re going to pay a lot of taxes and penalties. It’s different with the Roth IRA, because with the Roth you can withdraw your original contributions anytime you like but, with investment returns, you’re going to be penalized with early withdrawal fees.

There are a number of ways to withdraw your money early however, without risking any penalties. One of them, for example, is withdrawing up to $10,000 when you purchase your first home. A number of other early withdrawals can make a lot of financial sense in the long run and, if you’re keen on withdrawing money early from your IRA, these next four in particular are worth looking at. Enjoy.

As we mentioned, if you’re purchasing your first home you can withdraw up to $10,000 for either you and your spouse, your children, your grandchildren or your parents. It’s a lifetime cap however, and you have to pick just one of those people. For married couples the amount goes up to $20,000 but there is one caveat; the funds must be used within 120 days after they’re withdrawn. If for whatever reason your home purchase falls through or you make the decision not to buy, those funds need to be placed back in your IRA account

Withdrawing money from your IRA to pay for large medical expenses makes sense as well. If the unreimbursed medical expenses that you have are more than 10% of your adjusted gross income, using an IRA distribution to pay for them won’t result in any penalty. Keeping all of your receipts in order is vital if you do this however, because if the IRS audits you, you’ll want to be able to show them exactly where that money was spent.

Another expense that isn’t subject to the 10% early withdrawal penalty from the IRS includes paying for higher education, including tuition, room and board, fees, books and supplies. In fact, practically all expenses that you might incur in order to go to an accredited, degree-granting post-secondary institution can be paid for with the money you withdraw from your IRA without penalty. Unlike when you purchase your first home, you can also withdraw this money for yourself, your spouse, your children or your grandchildren since it’s not a “one and done” situation.

Finally, there’s withdrawing money from your IRA in order to pay for your health insurance if you’re unemployed for more than 12 weeks. If this happens, you can withdraw funds from your IRA in order to pay for insurance for yourself, your spouse and your dependents. You can also use this exemption in both the year you became unemployed and the following year as well, up until 60 days after you’ve found a new job and are employed again.

One thing to keep in mind is that, even though these early withdrawals from your IRA are penalty free, you still have to pay taxes on them. If they were put into your IRA on a tax-deferred basis, they’ll be taxed as ordinary income when you withdraw them and use them for any of the four payments above.

What that means is that, for example, if you withdraw $20,000 early in order to pay for your son’s tuition, your federal tax liability will increase by $5000 that year if you happen to be in the 25% tax bracket.

Of course, depending on why you withdraw the money and what you use it for, this extra tax might be worth the savings or the investment that it allows you to make.

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