IRAs: How to make an early withdrawal

Can I make individual retirement account withdrawals prior to age 59½ without penalty?

For one reason or another, you may need to take some money out of an IRA before reaching retirement. You can withdraw money from an IRA at any time and for any reason, but it's important to keep in mind that most IRA withdrawals are at least partially taxable. In other words, you'll owe regular income tax on the amount. In addition, the taxable portion of a withdrawal taken before age 59½, which is called an "early withdrawal," will be subject to a 10% penalty, unless you qualify for an exception. 

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Exceptions to the 10% IRS early withdrawal penalty include:

Withdrawals for medical expenses. If you have qualified medical expenses in excess of 10% of your adjusted gross income (AGI), early IRA withdrawals up to the amount of that excess are exempt from the 10% penalty. To take advantage of this exception, you don't need to trace the withdrawn amount to the medical expenses. However, those expenses must be paid in the same year during which you take the early withdrawal.

Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least 5 years or until you reach age 59½, whichever comes later. The rules for SEPPs are complicated, so you may want to get your tax adviser involved to avoid potential issues.

Withdrawals after death. Amounts withdrawn from an IRA after the IRA owner's death are always free of the 10% penalty. However, this exception isn't available for funds rolled over into a surviving spouse's IRA or if the surviving spouse elects to treat the inherited IRA as his or her own account. If the surviving spouse needs some of the inherited funds, they should be left in the inherited IRA (in other words, the one set up for the deceased spouse). Then, the surviving spouse can withdraw the needed funds from the inherited IRA without any 10% penalty.

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Withdrawals after disability. This exception applies to amounts paid to an IRA owner who is found to be physically or mentally disabled to the extent they cannot engage in their customary paid job or a comparable one.

Next: Withdrawals for first-time home purchasers (up to a lifetime limit)

Withdrawals for first-time home purchases (up to a lifetime limit). This exception allows penalty-free IRA withdrawals to the extent the money is spent by the IRA owner within 120 days to pay for qualified acquisition costs for a principal residence. However, there's a lifetime $10,000 limit on this exception. In addition, the buyer of the principal residence (and the spouse if the buyer is married) must not have owned a present interest in a principal residence within the 2-year period that ends on the acquisition date. Qualified acquisition costs are defined as costs to acquire, construct, or reconstruct a principal residence, including closing costs.

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Withdrawals for qualified higher education expenses. Early IRA withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year. The qualified expenses must be for the education of the IRA owner or the IRA owner's spouse, or a child, stepchild, or adopted child of the IRA owner or the IRA owner's spouse.

Withdrawals by military reservists called to active duty. This exception applies to certain early IRA withdrawals taken by military reserve members who are called to active duty for at least 180 days or for an indefinite period.

Also see: Can life insurance be used to pay estate taxes?

If you think you qualify for an exception to the 10% penalty on early traditional IRA withdrawals, consider involving your tax professional before making early withdrawals to be certain you do indeed qualify for the exception.

Next: Can I add a vacation home to my current homeowner's insurance policy?

I am in the process of buying a vacation home. Can I just add it on to my current homeowner’s insurance policy?

Your current homeowner’s policy may allow for coverage of two properties under one policy, but because there are unique risks with a second home, a separate policy may be more effective in providing the coverage you need.

Read: Legislation renews IRA charity tax break

An unoccupied home can invite trouble. Without a presence, there is no one to fix a leak, respond to weather damage, or even report a fire. It also may become a target for burglars. In addition, you may be considering renting out your home when you're not using it. However, having renters (or even guests) may increase your liability to any damage or injury associated with their stay.

Be sure to work with your insurance agent to secure the right coverage. Also discuss the benefit of raising your personal liability coverage to protect from any increase in risk to your personal wealth that may come with offering your home to guests and renters.

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Send your questions about estate planning, retirement, and investing to Joel M. Blau, CFP, c/o Urology Times, at UT@advanstar.com. Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.

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