When are IRA withdrawals penalty-free?

If you're 59 ½ or older you're usually all clear. But if you're younger than that, you will get hit with a penalty for early withdrawals from traditional IRAs, or early withdrawals on earnings from Roth IRAs.

But you can escape that 10% tax penalty if you're withdrawing the money for a few specific reasons.

These include:

  • Paying college expenses for you, your spouse, your children or grandchildren.
  • Paying medical expenses greater than 7.5% of your adjusted gross income if you’re age 65 or older. The threshold is 10% for those under age 65.
  • Paying for a first-time home purchase (up to $10,000).
  • Paying for the costs of a sudden disability.

Also, if you put money into your IRA but then decide you need it back, you can generally "take back" one contribution made to a traditional IRA without paying tax, as long as you do it before the tax filing deadline of that year and do not deduct the contribution from your taxes.

You can also withdraw money from a traditional IRA and avoid paying the 10% penalty if you roll the money over into another qualified retirement account (such as a Roth IRA) within 60 days. But then you wouldn't actually be able to spend it.

Are you really that desperate for cash? Well, if so, it is possible to take money out of your traditional IRA in what's called "substantially equal periodic payments." Here's how it works: The IRS will determine what amount you can receive each year based on your life expectancy. That's the amount you must withdraw each year.

Sound too good to be true? The method is certainly not without risks. Once you start substantially equal periodic payments, you can't stop the withdrawals until you're 59½ or five years have passed, whichever is longer. So there's no changing your mind. If you change or stop these withdrawals at any time, you'll get hit with that 10% penalty - applied retroactively from the time you first began receiving payments, with interest. So it's generally not a great idea if you're under 50. Even if you are over 50, you'll be eating away at your retirement nest egg, rather than building it up. That means you're likely to come up short when you actually do retire.

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