Most people plan to leave their retirement savings, including their Individual Retirement Account (IRA) assets, alone until they can withdraw them at age 59 1/2 penalty-free. But emergencies occur, and people need to make exceptions. If you find yourself in this situation, how can you avoid the tax implications?
Typically, any early withdrawal from a traditional IRA is considered taxable income. What’s worse, if you make a withdrawal before age 59 1/2, you may get hit with a 10% penalty tax. While it is likely impossible to avoid the income tax, you may be able to avoid the penalty. How? There are several exceptions to the rule that may apply to you.
There are four key categories: (1) withdrawals to cover medical expenses that exceed 7.5% of your adjusted gross income (AGI) for any tax year; (2) withdrawals to cover health insurance premiums when used to pay the premiums for you or your family members while you are unemployed; (3) withdrawals to cover higher education expenses for you or your family; and (4) withdrawals taken as substantially equal periodic payments (SEPPs), which are regularly scheduled withdrawals taken, at minimum, annually.
Many of these techniques are complicated, however. For example, there are varying definitions of “family.” And to take advantage of the health insurance premiums category, you must also be receiving unemployment compensation under some fairly strict parameters.
The more information you have, the more prepared you can be should you need to withdraw money early from your IRA. Call or email us so you can get the information you need to make a decision that’s best for you.