It’s always a good idea to keep your Individual Retirement Account (IRA) assets untouched until you can withdraw them penalty-free at age 59½, but you may need to make an exception in this economy.
How can you avoid the tax implications?
In most cases, all or part of any early withdrawal from a traditional IRA will be considered taxable income.
The taxable percentage of the withdrawal depends on whether you’ve made any nondeductible contributions over the years.
Additionally, you may get hit with a 10% penalty tax.
It’s likely impossible to avoid the income tax.
However, you might be able to avoid the 10% penalty tax by taking advantage of the following exceptions to the rule:
• Withdrawals to cover higher education expenses for you or your spouse, child or stepchild or your or spouse’s adopted child are penalty-free.
• Withdrawals to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for any tax year are penalty-free.
• Withdrawals to cover health insurance premiums are penalty-free when they’re used to pay the premiums for you, your spouse or your dependents while you are unemployed.
Many of these techniques are complicated, however.
For example, in regard to health insurance premiums, you must receive unemployment compensation for 12 consecutive weeks under any federal or state unemployment program during the current or preceding year.
Thus, you should seek advice from a tax professional or financial advisor before using any of these strategies.
They can tell you which strategies work best, given your individual financial situation.