Early withdrawals from a traditional IRA before age 59 1/2 generally incur a 10 percent penalty tax on the taxable portion of the withdrawal. There are several exceptions to this rule that can help you avoid the penalty under specific circumstances. I have outlined the key exceptions that may apply to your situation.
- Substantially equal periodic payments. You can arrange for a series of substantially equal periodic payments. This method requires careful calculation and adherence to strict rules but allows penalty-free withdrawals.
- Medical expenses. Withdrawals for medical expenses exceeding 7.5 percent of your adjusted gross income, or AGI, are exempt from the penalty.
- Higher education expenses. You can use penalty-free withdrawals for qualified higher education expenses for you, your spouse, and your children.
- First-time home purchase. You can withdraw up to $10,000 (lifetime limit) for qualified home acquisition costs without penalty.
- Birth or adoption. You can withdraw up to $5,000 for expenses related to the birth or adoption of a child.
- Emergency expenses. Starting January 1, 2024, you can withdraw up to $1,000 annually for emergency personal expenses without penalty.
- Disaster recovery. Withdrawals for qualified disaster recovery expenses are exempt from the penalty, up to an aggregate limit of $22,000.
- Disability. If you are disabled and cannot engage in substantial gainful activity, you can withdraw funds without penalty.
- Long-term care. Beginning December 29, 2025, you can take penalty-free withdrawals for qualified long-term care expenses.
- Terminal illness. Withdrawals due to terminal illness are exempt from the penalty.
- Post-death withdrawals. Amounts withdrawn after the IRA owner’s death are not subject to the penalty.
- Military reservists. Active-duty military reservists called to duty for at least 180 days can withdraw funds without penalty.
- Health insurance premiums during unemployment. If you receive unemployment compensation for 12 consecutive weeks, you can withdraw funds to pay for health insurance premiums without penalty.
- Domestic abuse victims. Starting January 1, 2024, you can take penalty-free withdrawals of up to $10,000 if you are a victim of domestic abuse.
- IRS levies. Withdrawals to pay IRS levies on the IRA account are not subject to the penalty.
It’s important to note that SIMPLE IRAs incur a 25 percent penalty for early withdrawals within the first two years of participation. Additionally, Roth IRAs have different rules, allowing penalty-free access to contributions but potentially taxing and penalizing withdrawals of earnings.
References:
- Internal Revenue Code Sections 72(t); 408.
- IRS Notice 89-25.
- IRS Notice 2024-55.
- Revenue Ruling 2002-62
- IRS Form 5329.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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