We live in a world where stuff happens.
Air conditioners break, kids need braces, and dogs need heartworm medication.
When the unexpected occurs and you suddenly find yourself in a cash-needy situation, one place that investors are tempted to raid is their Individual Retirement Accounts (IRAs).
If you don’t have a 401(k) that you can borrow from, your credit cards are tapped, and your emergency fund is in need of just that -an emergency, then tapping your IRA might be the only option.
This is the last resort, especially if you haven’t reached the age of 59 1/2. Did you know, however, that there are ways that you can withdraw your IRA without penalty?
Yes, that’s right. Uncle Sam was generous to allow you to touch your IRA under special circumstances. If you need the money for one of these reasons, then you might be in luck.
Table of Contents
Before We Continue, Some Words of Caution: Just because you can touch your retirement money with no penalty, doesn’t mean that you don’t have to pay the tax. If you’re withdrawing money out of a Traditional IRA, you’ll have to pay ordinary income tax. There’s no way of getting around that.
If you have a Roth IRA, however; you can pull your contributions at any time. The earnings have an age (59 1/2) and five-year test they have to meet before you can have access to those funds penalty-free. Then there’s the issue of compounding interest. If you keep taking money out of your IRA, there’s less to “compound” potentially leaving you short at retirement.
Paying Those Doctor Bills
An unexpected visit to the hospital can be a major financial blow to your nest egg, many have to take out a personal loan to pay off the debt. If your hospital bill is currently greater than 10% of your income, that portion that is above that will be penalty-free.
Health Insurance For the Unemployed
Lost your job and down in the dumps? A further complication comes when you’re trying to figure out how you are going to pay for your health insurance.
If you find yourself being recently let go and as long as you receive unemployment for 12 consecutive weeks, then you are allowed to tap your IRA to pay for health insurance premiums for yourself and your family.
Higher Learning
School days, school days, Good old golden rules days…
If you or someone in your family is planning on going to school, you can use your IRA money penalty-free to help with the cost including tuition, fees, books, supplies, room and board, and required equipment. To qualify, you (or they) must be going to school at least half-time to a college, university, or vocational school that accepts federal financial aid.
Note from me:
Home Shopping
If you are a first-time home buyer, you will have the option of using your IRA to live out the American dream. Each individual is allowed to pull $10,000 ($20,000 if you are married) to go towards
According to Fairmark.com, here are the requirements that you must meet:
- The purchase must be a principal residence.
- The person for whom it is a principal residence must be the owner of the IRA or a family member (within limits).
- The person for whom it is a principal residence must be a “first-time homebuyer” (generally someone who has not owned a home in the previous two years).
- The purchase must cover “qualified acquisition costs.”
- The purchase must be made within the applicable time limit.
This tax loophole can also be used to purchase a first home for a parent, child, or grandchild.
Disability
If and when someone has an accident or is diagnosed with a condition that gives them a permanent disability, it can be quite scary when it comes to paying the bills. If you have a permanent disability you can withdraw from your 401(k) early and get the money you need. You’ll have to provide a disability letter to your 401(k) custodian so that they will not hit you with the 10% penalty. You read more about 401(k) hardship withdrawal rules in another post.
Early Retirement Income
Another more complex strategy to try and avoid the 10% penalty is the rule of 72(t). The rule of 72(t) states that withdrawals from your 401(k) have to be “substantially equal periodic payments. You must use one of the three methods that the IRS has determined and then take your payment on a set schedule for a specific time period.
It is required that you take those payments for either 5 years or when you turn 59 1/2, whichever comes later. For example, if you start taking your payments at the age of 52, then you must do so for 8 years. Someone who starts at 57, must do so till the age of 62.
Please note:
If You Owe the IRS
If the Tax Man comes knocking at your door, he doesn’t care where the money comes so as long as you pay it: cash, check, or even credit card. And if it’s your IRA, you’re allowed to take money penalty-free to settle your tax debt.
Military service
Military reserve members may also be eligible to take early IRA withdrawals. To qualify for the tax exemption, you must have been ordered or called to active duty after Sept. 11, 2001, for more than 179 days, and the distribution must be made during the active duty period. The Army, Naval, Marine Corps, Air Force, and Coast Guard reserves are among the military branches whose members qualify.
Till Death Do Us Part
Death would seem to be the ultimate hardship and when an IRA account holder dies, the beneficiaries can take withdrawals from the account without paying the 10 percent penalty. However, the IRS imposes restrictions on spouses who inherit an IRA and elect to treat it as their own. They may be subject to the penalty if they take a distribution before age 59½.
Unlocking the Power of Penalty-Free IRA Withdrawals
| Situation | Description |
|---|---|
| Paying Hospital Bills | Penalty-Free IRA Withdrawals for Hospital Bills > 10% Income |
| Health Insurance for Unemployed | Use IRA for Health Insurance After 12 Weeks of Unemployment |
| Higher Learning | IRA Funds for Education Costs at Least Half-Time |
| Home Buying | First-Time Homebuyers Can Withdraw Up to $10,000 ($20,000 for Couples) |
| Disability Assistance | Penalty-Free 401(K) Withdrawal for Permanent Disability |
| Early Retirement Income | Rule of 72(T) Allows Penalty-Free 401(K) Withdrawals With Specific Rules |
| IRS Tax Settlement | Settle IRS Tax Debt Using IRA Funds Without Penalties |
| Military Service | Military Reserve Members Can Withdraw IRA Funds Post-9/11 Active Duty |
| Inheritance After Death | Beneficiaries Can Withdraw IRA Funds Penalty-Free Upon the Account Holder’s Death (Spousal Restrictions Apply) |
Final Thoughts on How to Withdraw Money From Your IRA Penalty-Free
While IRAs are primarily designed to safeguard one’s financial future in retirement, life’s unpredictabilities might sometimes necessitate premature access to these funds. Fortunately, several provisions permit penalty-free withdrawals under specific circumstances.
However, it’s imperative to approach such decisions with caution, understanding the tax implications and long-term impact on one’s retirement savings. Before making any withdrawals, consider consulting a financial advisor to ensure that the choice aligns with broader financial goals and doesn’t jeopardize future financial security.
I am 65 and want to take out 2,000 out of my IRA will I have to pay taxes and income tax on my withdrawel
Can you borrow money from your IRA account and what percentage be taxed
No
I’m still confused. I’m 62 years old. I’ve been disabled from a car accident since July 20, 2014. I want to know if I can take my IRA out a tax penalty to remodel a house so I can get in it with my wheelchair. Please send me an answer soon.
My mom has Alzheimer’s and needs care she wanted private care givers which is very expensive!
can that be taken out without being taxed IRA, If so how do we do that?
Can we take out to put an appartment in for my elderly mom ? We also have taxes owed and paid for summer college for our son. That’s way more than the $25,000 taken.
La schedule is very dificult but I want to pay my taxes car. toyota camry for to star Can I do by internet and I don’t know how, help me
Hi Isaias – You might want to talk to an accountant and get direct help with the various taxes you’re talking about.
I am 77 years old. If I withdraw Funds from my IRA is there a penalty?
Hi Michael – Nope, no penalty. You’re over 59.5.
My daughter is a single mother of 3 and works full time. She drives to work. Her car is completely unusable and is far to expensive to repair. May she cash in and IRA for 403B under a hardship case. She is really desperate for transportation.
Thank you,
nita
Hi Louise – Repairing or replacing a car isn’t a listed hardship, so any withdrawal would require paying taxes plus the 10% penalty. She might see if she can get a loan against her 403B though.
I’m 56. I have a ROTH and an IRRA. I want to take a distribution to pay for sons College tuition.
Would it be better to take from the ROTH than the IRRA. My thinking is it would be tax free and no penalty. But with the IRRA I’ll have to pay ordinary income tax, but no penalties
OR does it even matter.
Hi Deanna – The Roth is the better choice. There’s no income tax due on a withdrawal of contributions. You can withdraw $10,000 from the IRA and get the penalty waived, but not the ordinary income tax.
I took money out of my IRA in May and found to be disabled in July. I was in bad shape and fell behind on everything including child support. Can I get out of paying the penalty even if the dates don’t match. If I do will it just be taxed as income?
Hi Brett – Yes, you will pay ordinary income tax on the distribution, no matter what – the penalty is what’s in question. I do think you’ll have problem with the dates, since you became disabled after the distribution. But please discuss it with a CPA and see what your options are. The tax code is very complicated, and there may be an out for you.
I am 32 years old. I am moving to another job but I am taking a 14K annual salary reduction. does this qualify as hardship, can I take out my 401k without penalty?
Hi Adriana – I seriously doubt it.
If I withdraw funds from a self-directed i.r.a., to use the funds for closing costs on a second home, if i put the funds back into my fund, say within six months, will i avoid any penalties?
Hi Paul – I don’t think so. If you withdraw funds from an IRA, you’ll have to roll it over to a new IRA within 60 days, not six months. And there’s no exemption for buying a second home. I’d find some other way to pay the closing costs. Taking money out of an IRA will be expensive.
I’m 52 years old and I live in Louisiana the last job I had the department close down and I have traditional IRA. My current job i have now doesn’t offer retirement at least not now. For the last month (today’s date is 6/5/2018 as I’m sending this message) since my current job doesn’t offer a rollover I decided to cashout my IRA distribution. Ok they mail my forms to me to sign it’s 5 forms. I fax my 5 forms to them as a matter of fact more than one time. Because the different times I call to check the status of my IRA contribution they say they don’t have all of my forms. I called numerous of times and each time they tells me they don’t have a certain page and then I would fax that page to them. When I call again checking the status, they say they don’t have that certain page and this just keeps going on everytime I check for my IRA status What could l do next?
Hi Paula – Forget about faxing the documents. Instead, send them by certified mail, that way you’ll have a receipt and you’ll be informed by the post office when the package has been delivered. If you want it to go faster, send it by courier in one or two days. It will cost a few dollars, but it will guarantee they’ll get the papers. Just make sure you keep a copy of everything you send.
I have a 401k plan here in California. If i roll my plan over at a new job in Oregon will i have to pay tax on distributions after 59-1/2?
Hi Mike – The state you live in won’t matter as far as federal tax. You’ll have to pay tax on any tax-deductible contributions to any retirement plan, plus accumulated investment income. Is your question about California taxes while you live in Oregon? If so, you’ll have to check into California tax law for the answer. I know California has a very complicated tax code, and anything is possible. Sorry I can’t be more help.
I’m 56 years old. I just recently lost my job. I need about 35,000 dollars if my IRA account to pay off some bills, like my car note, my daughter college funds, some medical bills and credit cards. Will I be able to withdraw money from this account with out being penalized.
Hi Shirley – Yes and no. You can if you set up a series of substantially equal payments from the IRA. But the money will drip out over many years, subject only to ordinary income. It won’t be available in a lump sum the way you want. (Unfortunately, the “separation from service” provision that would allow you to take money beginning at age 55 doesn’t apply to IRA accounts.) But one advantage is the education costs. You can get a break on the penalty for the amount paid for qualified education expenses. You may also get a break on the medical portion, but you’ll have to see if you’ll qualify. Under the new tax law, it’s unlikely, but an accountant might be able to give you an idea.
The other alternative is to withdraw the money you need, then pay both the tax and the penalty.
If you can wait until you reach 59.5, you can at least avoid the penalty on the entire withdrawal.
I am 65 years old and have a fair amount of money in a traditional IRA, which was rolled over from a retirement at a medical center. I want to buy a newer car but used for about $20,000. Can you tell me what are the tax implications are for withdrawing this amount?
Hi Patrick – Most likely you’ll have to pay regular income tax on the amount withdrawn. Calculate the tax liability on the withdrawal, you may have to take a bit more to cover the tax. Otherwise you should be good to go. (BTW, the IRA trustee should be able to help with both the withdrawal and the tax liability.)
I am 61 years old … still working . Can I begin taking withdrawals (monthly) from my ira?
Hi Larry – You can, and since you’re over 59.5 years old, you won’t be subject to the early withdrawal penalty, just regular income taxes.
I’m 28 years old and I was wondering if I can contribute to my Traditional IRA ? I’m alittle confuse on how it works. I just lost my job and I owe student loans that has put me in Default on the treasury offset. I’m on a rehabilitation repayment plan but now i have to wait to file my taxes if not they will take everything! Can thr traditional IRA help. Also I’m filling married and my husband get income from Veterans Affairs hes military disability retireed (which its not taxable so he doesnt get a form to file it). Can i contribute Transition IRA on hes too? Please help
Hi Melanie – You should be able to contribute to an IRA as long as you have earned income. I don’t know if that will protect the money from the student loan creditor, it depends on the laws in your state. You may be able to do a spousal IRA on your husband, if you have enough income to cover both contributions. You may want to talk to an attorney in your state about the safety of those contributions in light of your student loan default. Most states protect IRAs from creditors, but not all. And there may be complications since you’re already in default and subject to offsets.
I have ir a in stocks i am 67 can I take out money without paying a penalty
Hi Greg – Since you’re over 59.5, you should be able to take distributions free of penalties. You will have to pay tax on the withdrawals though.
I lost my job in 2016. I received 12 consecutive weeks of unemployment during 2016. I am still unemployed and took an early withdrawal of $20,000 from my 401k in 2017. Can I use exception 7 on Form 5329 for the health insurance premiums that I had to pay?
Hi Dena – You meet the criteria, so you should be able to. But you will have to show that all of the $20,000 went for health insurance premiums.
I fell like I already know the answer, but…
I was unemployed in 2016 for at least 6 months and had to tap into my ROTH, but it was because I needed to pay rent and feed my son. I don’t suppose they’ll give me a break?
Hi Eric – With a Roth, you should be able to withdraw you contributions tax free and penalty free. Check with your tax preparer.
I took out 1000 dollars from my i.r.a. had them take out the tax , what form do i use to file for my tax return .
Hi Antonios – You report the withdrawal on IRS Form 5329.
My husband lost his job and his 401k got rolled over into an IRA. Can we take the money out to pay off our house without a penalty. He is having trouble finding a job and we don’t want to lose our house.
Hi Debbie – Not specifically for that purpose (paying off the mortgage). But you might be able to access the funds on an annuity basis with a 72t withdrawal plan, that allows you to take out a certain amount each year. You won’t have to pay the early withdrawal penalty, but you’ll still have to pay regular income tax on the amounts distributed. Talk to the plan trustee about setting it up.
if i am over 59 1/2 can i take withdrawals from my 401k or traditional ira as I need monies or am I required to take periodic withdrawals
Hi Dennis – Once you hit 59.5 you can do just about anything! That said, your employer may have rules on the 404k that you’ll have to check out.
My daughter had a small rollover IRA. She still lived at home, unmarried. She passed away. Can I cash that out & will there be taxes & penalties?
Hi Patty – I’m very sorry for you loss. You should be able to withdraw the money. You will have to pay ordinary income tax, but no penalties.
I will be 91 in a few months and have an IRA with approximately $7,000 left . Can I withdraw all of it without a penalty.
Hi Jack – I don’t see any problem. You’re over 59.5 so penalties shouldn’t apply.
I have $14,000.00 in traditional IRA. I am running low on money now. I need @ $3,000.00. I am 65. Should I take out shares or dollars and will I just have to pay the taxes on this amount at the end of year?
Hi Cassy – Not sure what you mean by shares, but the withdrawal will be determined in dollars. You’ll have to pay tax on the $3,000 dollar amount withdrawn. You’re 65 so there won’t be a penalty.
Hi Jeff; I will be 59yrs old in January 2018. I have been receiving SSDI for the last two years complete total and want to empty my Roth that I have with the federal government to put down on a home. This will not be a first home for me, but due to my disability it has become necessary for us to move to a ranch home. Question. I can do this without penalty, and because it’s a Roth will not have to pay taxes. The account is only 4yrs old. Any advice would be appreciated,
Hi Saundra – You’re good on your contributions, and I think you’re good on the investment earnings as long as your disability is total and permanent. But please check with your tax preparer before proceeding.
I’m 58 and was laid off from work. I rolled over my 401k into an IRA and I’m considering a 72T. I know of taking the payments for 5 years. Before the 5 years is up, and after I turn 59 1/2, can I withdraw a lump sum in addition to the 72t schedule without the 10% penalty?
Thank you very much!
Hi Stephen – I believe that the lumpsum distribution invalidates the 72t. But if you wait until you turn 59.5, you can do whatever you want anyway.
I need to take $10,000 out of my IRA for my sons college education. Will I be penalized for this?
You can Brenda, according to IRS guidelines. But while you can take the money out for college, you will avoid the 10% early withdrawal penalty. But you will still have to pay ordinary income tax on the distribution.
Can I withdraw from a Roth penalty free to pay a State tax debt?
Hi Jason – Not unless you’re at least 59.5 years old and in the Roth plan for at least five years. There’s no exemption for paying state income tax. Sorry!
I’ve had an IRA for ten years with no withdrawals I’ll be 70 years old this May can I withdraw 5,000 dollars without penalty and paying taxes on that money ?
@Sylvester Yes, you sure can.
I’m 61 I have an ira that is a cd and maturing at the end of the month. Can I take part of it to put in new flooring in my house. If so how do I know how much tax to hold out.
Hi Peggy – It really depends on your other income, your deductions, your tax rate, and the amount of the withdrawal. You need to sit down with a tax preparer or CPA to figure that out. It’s certainly not a question that can be answered online. Alternately, you can have your IRA administrator do a 20% withholding from the distribution. That should get you close to the actual amount owed.
I have a brother who is autistic and has worked for 39years in a hospital. He also has mental disabilities but has been able to maintain a job all of this time. A few years ago he was coerced into signing a home mortgage on a home he was living in with my brother.Actually he was not aware he signed a mortgage . He just thought he was paying my brother rent. He and my brother were the owners of the home..only my brother with special needs was the only listed on the mortgage. Now he has had a judgement placed against him for $23,000 because a pipe burst in the home and caused damage to the home next to it. Due to being abused by the other brother I had taken this brother out of this home. I had no knowledge he signed this mortgage..therefore the home is currently in foreclosure. I need to cover his part of the judgement as they already emptied out his bank account and I need 35,000 from his IRA to cover legal fees(I am seeing an attorney to get help for him) and o cover the rest of the judgement. He is 57 years old and I was wondering being this is an urgent issue because he has no money to live on now as he makes very little money. He does live in a studio apartment alone. Will I have to pay the penalty under these urgent circumstances. I would like to know also how much he will clear (NY) after taxes..he is single head of the household.
Hi Marianne – This situation doesn’t come under the usual IRS penalty exemptions. There is a possibility that if he can be declared disabled before you make the withdrawal that the penalty will be waived. But this is a complicated and unusual situation, so I’d discuss it with the attorney, or with a CPA.
My wife and I are considering using each of our IRAs to purchase a home. There are a few variables that I have not been able to find the answer to and I hope you can help. I opened my ROTH IRA 18 years ago but it has changed institutions 3 times. I have not made any contributions in 15 years and only have $6,500 in my ROTH. My wife has $15,000 in a traditional IRA. I know if she takes out $10K we will be taxed 33%.
How do I prove the IRAs have been open as long as they have?
Will I be taxed on any withdrawals on my ROTH IRA- because it is all basically earnings?
Hi Chaz – Do you have statements proving that you’ve had your IRAs for that many years? Also, I’m not sure why you need to prove that they’re that old. As to the tax on the Roth withdrawals, you will have to pay tax on them if they’re mostly earnings. You will have to pay a 10% penalty on the withdrawals as well if you are under 59.5. But IRS rules allow you to withdraw up to $10,000 from your IRA IF you are a first-time homebuyer. That will exempt that portion from the penalty, but not the ordinary income tax.
hi, I have been out of work for the last 4 years due to health issues, I m still waiting to be approved by ssdi , I do have a 401k , but my ex employer doesnt not allow me to withdraw, small amounts , it has to be everything and opening up a roth ira , and maybe use a 72 payments to help the bills, I’m 54 and would like to know if you can help.
Hi Joao – The IRS does allow hardship withdrawals for both medical costs and 72t payments. That said, it sounds like your former employer may not. Do you need the money to survive? If so, you may have to take the lump sum and figure out the best way to go with it. Talk with a CPA, but also with someone in authority with your 401k plan. It sounds like your in a situation where something SHOULD be worked out.
Can I withdrawal money from my 401 (K) to purchase a home (first time buyer) without getting penalized 10% . Do I transfer the money to an IRA? and then withdrawal the money? Thank you.
Hi Suzy – There’s no hardship withdrawals permitted from a 401k for buying a house, but a better route may be taking a loan against the 401k. There will be no tax liability or penalty, and you can repay the money as if you never took it out.
Can someone take a loan from TSP AT 59 1/2 to buy a house and not have to pay the loan back? They will continue to work and pay into TSP but do not want to have to repay the home loan.
Hi Keneitha – I’m not aware that that’s possible. However, with a residential loan you can take up to 15 years to repay, and that should result in very low monthly payments.
I have a question and am so confused on all the data. I inherited an IRA when my husband passed. It is in my account now as an individual IRA. I am 64 years old and would like to withdraw the total amount/minus what I will pay in taxes. I have expenses, have to move and need to buy a car. Can I withdraw and empty the total amount?
Hi Fae – Yes, you can empty the entire account. Since you’re over 59.5, you will only have to pay ordinary income tax, but not the 10% early withdrawal penalty. You might consider taking part of the money in 2016 and the rest in 2016 to spread the tax liability over two years.
Thank you for your prompt reply. Another question…………will the money I withdraw be considered income , as in a senior housing situation. I realize I will have to pay Federal income taxes and I am prepared to do that. My SS is 20K a year and I cannot show income for more than 30K a year to qualify. Should I still take out 1/2 this year and 1/2 next year? I have no problem with that. I need to stay in the guidelines of senior housing.
Hi Fae – I’m not qualified to answer that question. Since it’s specific to the senior housing arrangement, you need to check with them to see how that works.
I would like to know how I can take my husband off my ira as a beneficiary and put my children on we are not divorce but not getting alone and I’m moving out
Hi Janice – Contact the IRA trustee and ask them how to do it. They will have a process in place, so it shouldn’t be a problem.
Do you have to retire to use the 72t distribution? Can you do it as a one time withdrawal?
Hi Wanda – You don’t have to be retired. But as to the withdrawal amount, it will depend on the purpose of the withdrawal. For more information, check out the IRS chart of reasons. For example, for a first time homebuyer you can take out $10,000 in a lump. But for income distributions, you’d have to use a series of payments based on life expectancy.
Can I continue to actively invest the ira my 72p sepp comes out from or do I need a second separate idle 72t ira. ? Thanks. Greg
Hi Greg – Do you mean invest or contribute? If you mean contribute, then you cannot add to the account you’re taking withdrawals from. You have to contribute to a different IRA account, or open a brand new one.
My husband has been living here in the United States since 2000. He moved here from Colombia and has been here under political asylum. He is not a resident or a citizen and has no intentions on returning to Colombia. He has about $10,000 in a traditional IRA account and we want to withdraw the money. I read that they will take an additional 30% on top of the 10% due to him being a nonresident. Is there anything we can do to avoid having to pay the 30%? Thank you
Hi Lane – I haven’t found anything in the IRS regs that calls for higher withholding on a non-resident, but it wouldn’t surprise me. As to ways to avoid this, you really need to consult with a CPA. On $10,000 you’re looking at a potential liability of $3,000, so it may be worth spending some money to get the right answer. My guess is that the 30% is just the withholding percentage, which may be lowered when he files his income tax return. At that point he’d get a refund.
Hi I need 10 thousand to pay for my 2 two children ortho (braces) can I claim medical hardship
Hi Kelly – You can, but only to the extent that the amount of unreimbursed medical expenses exceeds 10% of your adjusted gross income. That applies if you take the money from either a 401k or an IRA.
I was married for 24 years and then divorced. I was awarded 1/2 of his IRA. I need to cash it in to avoid my home being foreclosed on.
I’m not sure how to go about this. The amount I will get is around 7,500. I know nothing about the taxes and how to do this. My lawyer just said to talk to my tax guy. I don’t have one. Any advise?
Hi Barbara – You may need to get a tax guy for this, especially when it’s time to file. Depending on what your income is, apart from the IRA withdrawal, the tax liability may not be that high – I’m assuming that low income is one of the reasons you’re facing foreclosure. But either way, unless you’re age 59.5 or higher, there will be a penalty of 10% of the distribution due to the IRA for early withdrawal. At a minimum, you should have at least 10% of the distribution withheld for taxes by the IRA trustee, that way you don’t get an unpleasant surprise when file your return.
It doesn’t look like meet the requirements for any of the acceptable penalty tax exclusions.
When withdrawing from an IRA to pay for first-time home how will I show the IRS that this withdrawal went towards a home purchase? Will I just designate that as such on my tax filings for the year?
Hi Dan – You should make clear to your IRA custodian what the purpose of the withdrawal will be. In the best of all worlds, the custodian will issue Form 1099-R with a code “2” in the distribution code box, indicating that it is an exception. Failing that, you will have to maintain a paper trail proving the use of the funds. That will include a copy of the sales contract and the HUD1 closing statement as evidence that the sale closed. The contract should be dated within 120 days of the withdrawal.
Just keep in mind that you are limited to $10,000 on the withdrawal, and that while you will be exempted from paying the 10% early withdrawal penalty, you will still owe for ordinary income tax on the distribution.
I have an offer in compromise with the IRS to settle tax debt in the amount of $12,000. I am currently on a payment plan with the State to pay off tax debt. The IRS wants me to take it from my IRA. What taxes/penalties will I have to pay if I take out the full amount of $19,000 to pay off the IRS and State?
Hi Geoff – If I understand it correctly, you will have to pay regular income tax on the amount withdrawn, but you can get an exemption from the 10% early withdrawal penalty for payment of an IRS levy. That said, you need to discuss this with a CPA or tax attorney. I don’t know if the exemption also applies to a state tax levy. You may want to use the IRA withdrawal to pay the IRS and figure something else out with the state liability.
my spouse has terminal cancer (likely 6 or less months at this point) – she has applied for disability status, but decision is yet pending – she has an IRA with $42,000 and no beneficiary (other than me) – we have some hefty debts we would like to resolve, as much as possible. IF I read correctly, if we use it now, we pay the 10% penalty, plus taxes on the withdrawal. If we wait until she passes, I can withdraw the funds without penalty, pay the taxes owed, and then use to pay the debts.
Is this correct? Thanks for the reply.
Hi Tom – That unfortunately appears to be true, and I checked IRS Topic 557 – Additional Tax on Early Distributions from Traditional and Roth IRAs before writing my response. But I’d discuss this with either a CPA or a tax attorney. The tax code is incredibly complex, and there are loopholes everywhere. It’s always “Never, except when…”
I am a 100% disabled vet and I had a very small 401k from a previous job and they took the taxs and penalty fees . I just got the form from said 401k transaction to file my taxes . Can I get that money back,? Any info would be great ! Thank you please reply to
Thanks , J Tracy
If I am a 100% disabled can I cash in my IRA without having to pay a penalty? If so what do I need to get for the istatutoin that I have it with?
You can Kyle – IF you as long as your disability is “total and permanent” (sources: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions ).
You will be exempt from the 10% early withdrawal penalty, but you will still have to pay regular income tax.
If you want to set this up, please use the services of a CPA. It’s very specialized and it’s not a place for do-it-yourself tax preparers, or even for preparers who do tax work on the side. Good luck!
I was wondering if I could pose this question and get an answer. My elder sister has a simple IRA. She is 85 years old until next Oct. Every year since turning 70 1/2 she has had the required IRS RMD taken out. For 2014 she took a lot less then she needed. When asked why, I was told she thought she took enough so she didnt want to take more and had told the bank to stop taking the monthly amount out and not to place it in her bank acct for the same reason she gave me. Not sure why the bank didnt tell her she had to take out more but they never did. As you see she is getting up there in age and last year someone bumped, hit, whatever her at a cross walk with their car. She was thrown down, hit her head and back and has not been quiet the same since. Though she probably wont admit it. Anyway I need to know what told do. The IRS Form 5329 and Instr. say the penalty is 50% of the RMD not taken as a penalty? Wow. So say she didnt take 10000 then does that mean she owes 5000. Thats nuts. It does say they might waive the penalty or a portion if she can prove it was due to reasonable error? How does one prove that?
I am looking at unconventional means to manage my weak financial position – 53 years old, around $60K in gold IRA, one kid about to enter college/another in 3 to 4 years, starting over on a mortgage due to a divorce (debt equals owed). I am looking at Bank On Yourself, and one advisor suggested something about a 72t distribution on my gold assets, but wasn’t sure it would work, so I Googled it and found your web site. I’m not looking for a miracle, or maybe I am in this economy. I work very hard as a self-employed remodel contractor. Any thoughts?
@ Cary That’s a tough call without knowing more of your situation. With $60k in your IRA, I hardly think doing the 72t distribution would be worth it.