In this economy, you may need to take an early IRA withdrawal — meaning before age 59 1/2. Needless to say, there are tax implications, including the possibility of getting socked with the dreaded 10% premature withdrawal penalty tax.
In most cases, all or part of any traditional IRA withdrawal will count as taxable income. The taxable percentage depends on whether you’ve made any nondeductible contributions over the years. While it may be impossible to avoid an income tax hit from taking an early withdrawal, you might be able to avoid the 10% penalty tax by taking advantage of several exceptions. Here’s a list of them along with brief explanations.
Substantially Equal Periodic Payments (SEPPs)
SEPPs are annuity-like IRA withdrawals that you must take at least annually. There are three different methods for calculating them. One is relatively simple; the other two are complicated. The amount of the penalty-free SEPP that you can take each year can vary by thousands depending on which method you choose.
You must continue taking SEPPs from the annuitized account for at least five years or until age 59 1/2, whichever comes later. If you don’t stick with the program, the taxable portion of all pre-age-59 1/2 withdrawals from the annuitized account can be hit with the 10% penalty tax. Ditto if you take more or less than the annual SEPP amount from the annuitized account. That’s why I recommend seeking advice from a tax pro before embarking on a SEPP program that would involve substantial dollars.
Withdrawals to Cover Medical Expenses
If you pay medical expenses that exceed 7.5% of your adjusted gross income (AGI) for the year, you can take penalty-free early IRA withdrawals up to the excess amount.
Withdrawals to Cover Higher Education Expenses
Early IRA withdrawals are penalty-free to the extent you pay qualified higher education expenses during the year. The expenses must be for your education or for your spouse, child, stepchild, or your or your spouse’s adopted child.
Withdrawals to Cover Health Insurance Premiums While Unemployed
This exception is limited to those who receive unemployment compensation for 12 consecutive weeks under any federal or state unemployment compensation law during the current year or the preceding year. Early IRA withdrawals taken during the current year are penalty-free when they’re used to pay for health insurance premiums for yourself, your spouse or your dependents. However, early withdrawals taken after regaining employment for at least 60 days don’t qualify for penalty-free treatment.
Similar Posts:
- What features of Roth IRA you need to consider
- The five top easy access savings accounts
- 401k Rollover – How to do it
- The 20 best savings accounts
- Life Insurance Planning
