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IRA Withdrawals that Escape the 10% Tax Penalty

The list of IRA withdrawals that may be taken without incurring a 10% early penalty has grown. The reason withdrawals...


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The reason withdrawals from an Individual Retirement Account (IRA) prior to age 59 1/2 are generally subject to a 10% tax penalty is that policymakers wanted to create a disincentive to use these savings for anything other than retirement. 1

Yet, policymakers also recognize that life can present more pressing circumstances that require access to these savings. In appreciation of this, the list of withdrawals that may be taken from an IRA without incurring a 10% early withdrawal penalty has grown over the years.

Penalty-Free Withdrawals

Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59 1/2, without a tax penalty. Ordinary income tax, however, generally is due on such distributions.

Death

If you die prior to age 59 1/2, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into his or her IRA, he or she will forfeit this exception. 2

Disability

Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician. 3

Substantially Equal Periodic Payments

You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59Ω or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional. 4

Home Purchase

You may take up to $10,000 toward the purchase of your first home. (According to the Internal Revenue Service, you also qualify if you have not owned a home in the last two years). This is a lifetime limit.

Un-reimbursed Medical Expenses

This exception covers medical expenses in excess of 7.5% of your adjusted gross income.

Medical Insurance

This permits the unemployed to pay for medical insurance if they meet specific criteria.

Higher Education Expenses

Funds may be used to cover higher education expenses for you, your spouse, children or grandchildren. Only certain institutions and associated expenses are permitted.

IRS Levy – Funds may be used to pay an IRS levy.

Active Duty Call-Up

Funds may be used by reservists called up after 9/11/01, and whose withdrawals meet the definition of qualified reservist distributions.

With an IRA, once you reach age 70 1/2, generally you are obligated to begin taking required minimum distributions.

Your required minimum distribution (RMD) may be based on your age or the deceased‘s age at the time of death. Penalties may occur for missed RMDs. Most are required to begin by December 31 of the year following the date of death. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. You will pay taxes on any distributions you take. Consider speaking with a financial professional who can help you evaluate the potential impact an inheritance might have on your overall tax situations.

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which may have an impact on after-tax investment returns. Please consult legal or tax professionals for specific information regarding your individual situation.

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.

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DISCLOSURE: Investment advisory services are offered through Gretchen Stangier, Inc. DBA Stangier Wealth Management (“Stangier Wealth Management”), an investment advisor registered with the U.S. Securities and Exchange Commission. Stangier Wealth Management only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided copies of the firm’s ADV Part 2A brochure and Part 3 documents.

DISCLAIMER: This website is for informational purposes only and does not constitute a complete description of our investment services or performance. This website is in no way a solicitation or offer to sell securities or investment advisory services except, where applicable, in states where we are registered or where an exemption or exclusion from such registration exists. Information throughout this site, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS OR ANY ‘LINKED’ WEBSITE.

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