With all the RothMania spreading, especially since the income limits for converting from a traditional to Roth have been removed, I’m afraid that the needed discussion regarding the Traditional IRA has been neglected. So today, I’d like to discuss how you can avoid a penalty while withdrawing money from your IRA, a few better than others.
- The Section 72(t) Withdrawal – I went into some depth on this one last year, the simple explanation is that you can take a “series of substantially equal periodic payments” for at least 5 years or age 59-1/2 whichever comes second. This is an excellent choice if you are in your late 40’s/early 50’s and either have enough to retire or have other income you know will kick in later, such as a pension.
- 401(k) withdrawal after age 55 separation. 401(k)?? Where did that come from? Well, you see, most 401(k) accounts permit a transfer from an IRA. So, if you are 55 are know it’s your last year working, you may be able to transfer the IRA into your 401(k) and take advantage of a not so well know rule that permits withdrawals if you leave the company at 55 or older. This leaves you more flexible as you avoid the hassle and term involved with the 72(t). Of course, if the 401(k) fees are high, you’d better think twice before pulling this stunt.
- Die. Well, I hope not, I need all the readers I can get. But, if you should have a loved one pass on and leave you money in their IRA, your withdrawal are not subject to penalty, just ordinary income tax (unless the IRA is a Roth or have post-tax money in it). Normally, you are required to begin taking RMDs (required minimum distributions) the year after you receive the money, but you don’t have to take more than that.
- Disability – From IRS Pub 590: You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration. A short term inability to work does not pass this definition.
- Medical expenses which exceed 7.5% of your adjusted gross income. It’s a pretty high number, hopefully, you’ll never hit it but good to know.
- “First Time” home purchase. The quotes are not to be cute, the IRS gives you the first time status if you’ve not owned a house for 2 years. If that’s so, you may withdraw up to $10K to use for the purchase and pay tax only, no penalty.
- Higher education – for you, your spouse, kids, or grandchildren. As with the home purchase, you still don’t avoid taxes, just the penalty. You can take out the full expense, including tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
That’s it for now, 7 ways to withdraw from your IRA penalty free (but not tax free). I hope you find this useful.