Retirement is something each of us should plan for. Not surprisingly, you want to make sure you have enough income to last your entire life. Theoretically, if you plan well, you could even retire early. You may have sold your business for a profit, maximized your contributions to your retirement account, invested in non-qualifying accounts, and owned multiple rental properties.
In such a perfect scenario, you could receive a mixed distribution of various accounts and investments, allowing your money to continue to grow in a tax sensitive manner. On the other hand, if you withdraw distributions from your retirement accounts before age 59 and a half, you may owe the IRS a 10% early distribution penalty. However, there are a few conditions under which the government will waive this 10% early retirement penalty.
Before continuing, I would like to clarify one thing. The purpose of this article is to educate you on ways you might be able to avoid the 10% tax penalty. If you withdraw money from your qualifying retirement accounts sooner, you will continue to pay regular income taxes on that money.. You cannot avoid this.
With that settled, let’s take a look at some of the ways you might avoid the early retirement penalty.
N Â° 1: Withdrawal of IRA for medical expenses
Life is full of surprises. Some are great, but others can cause major problems. Often, surgeries, hospitalizations and accidents are unforeseeable circumstances. To the stress of these moments are added the significant medical costs that they can entail. While your health insurance should offset some of these costs, you could still owe hundreds or even thousands of dollars out of pocket. What if you have a tight monthly budget? How do you pay these expenses if the billing companies do not accept small monthly payments?
Fortunately, you can withdraw from your Traditional IRA to important medical expenses without having to pay the early withdrawal tax penalty of 10%. Keep in mind that there are a few conditions. You don’t want to withdraw small amounts of money from your IRA to pay for drugs or occasional doctor visits. Instead, these expenses should come from your normal monthly budget.
To withdraw money and avoid the 10% penalty, your medical expenses must exceed 10% of your adjusted gross income. Likewise, you should use the money to cover expenses that your health insurance did not cover.
N Â° 2: Withdrawal of IRA to pay for health insurance
Likewise, you can pay health insurance premiums using IRA dollars if you meet certain conditions. IF you lose your job AND While collecting unemployment benefits for 12 consecutive weeks, you can use your IRA funds to pay for health insurance for you, your spouse, and your dependents.
Again, there is a catch. To use IRA funds for this purpose, you MUST take the distribution in the same year you received unemployment benefit.
N Â° 3: Withdrawal of the IRA in the event of disability
Unfortunately, many of my clients have had to take early distributions from their IRAs due to a disability. If you become disabled, you may qualify for Social Security Disability Insurance (SSDI) and / or Supplementary Security Income (SSI) benefits, but most SSDI recipients receive between $ 800 and $ 1,800 per month. The average monthly benefit for 2021 is only $ 1,277. Anything is better than nothing, but if you’re a business owner, you’re probably used to making a lot more than that.
Therefore, if you become disabled AND you have a doctor who approves the severity of your condition, you could withdraw money from your IRA, without penalty, to supplement your SSDI income. While hopefully you never have to use this option, at least you know it’s a possibility.
# 4: IRA Withdrawal for a First Home Purchase
On a more edifying note, you can make an early withdrawal from your IRA to purchase your first home without incurring the 10% penalty. I know you may be nearing retirement, but you may never have owned a home. Perhaps you have rented apartments or houses all your life due to business travel, commuting or other circumstances. I have even seen cases where a person lived in a house inherited from a family member and then sold it before moving to a smaller house for retirement.
If you are buying or building your first home, you can withdraw $ 10,000 if you are single or $ 20,000 if you are married (if you both have an IRA) from your traditional IRA.