If you selected a traditional IRA (as opposed to Roth), one of the drawbacks you will have to contend with is a strict 10% penalty for early withdrawals. But, as strict as this rule is, there are a few exceptions you should be aware of. In certain circumstances, you don’t have to be 59 and ½ to make penalty-free distributions. Today, we’ll teach you what you need to know about early withdrawal penalty exceptions for a traditional IRA.
If you have a traditional IRA, you should know about these 4 early withdrawal penalty exceptions!
First-Time Homebuying
In recent years, the tax advantages associated with homeownership have dwindled somewhat. For this reason, countless millennials across the country have resigned themselves to the prospect of renting for life. But there are still numerous tax advantages you might want to avail yourself of—and one of these involves early withdrawals from a traditional IRA.
If you’re a first-time homebuyer, you can use as much as $10,000 from your IRA without paying an early withdrawal penalty. Keep in mind, though, that you have to use this money within 120 days of when you distributed it.
Medical Costs
When most people think of a traditional IRA, medical costs don’t commonly come to mind. But maybe they should. There are basically two situations in which you can make a penalty-free early withdrawal from your traditional IRA. When unemployed, you may do so for your health insurance premiums. Regardless of your employment status, you can make a penalty-free withdrawal for any portion of a medical expense exceeding 7.5% of your annual income.
Birth of a Child
Having a child is expensive, and the IRS recognizes that. If you’ve recently had a child, you can withdraw $5,000 penalty-free from your traditional IRA. Keep in mind that this applies both to biological children and adopted ones. You’ll have to use this money within a year of their birth or adoption. Both parents may make this distribution, so two parents could withdraw a combined total of $10,000!
Higher Education Expenses
The costs associated with higher education have skyrocketed in recent decades—often astronomically. But the IRS wants as many people as possible to invest in their education. As such, they allow a penalty-free early withdrawal from a traditional IRA to pay for higher education.
What qualifies as a higher education expense? For the full-time student, pretty much everything. This includes tuition, room and board, books, and other supplies (for part-time students, room and board do not qualify). There is no cap to how much penalty-free money you can withdrawal from your IRA for higher education—so take advantage of it!
Contact Bowman & Company Today
Bowman & Company CPA, PC provides all of our individual and small business customers with experienced, accurate, and affordable financial services. Our financial services aim to decrease your taxes and increase your net worth through responsible, timely, and accurate record keeping. We offer our services to clients throughout the Washington, D.C., metropolitan area, including Maryland and Baltimore County, Columbia, and Howard County. For more information on our offerings, contact us online or call us at (410) 381-8121. You can also find us on Twitter, Linkedin, Facebook, and Youtube.