IRA Withdrawals – Exceptions to the Early Withdrawal Penalty

IRS Withdrawals – Exceptions to the Early Withdrawal Penalty

Understanding the exceptions to the early withdrawal penalty for IRA distributions can help you make informed financial decisions. Here are key exceptions that allow penalty-free withdrawals:

1. Medical Expenses

Withdrawals for medical expenses exceeding 7.5% of your adjusted gross income (AGI) are exempt from the 10% penalty. You can withdraw up to the amount that exceeds this threshold, regardless of whether you itemize deductions.

2. Qualified Higher Education Expenses

Early IRA withdrawals for qualified education expenses are penalty-free if the expenses are for you, your spouse, or your children (including stepchildren and adopted children).

3. Qualified Home Acquisition Costs

You can withdraw up to $10,000 penalty-free for costs associated with acquiring a principal residence, as long as you use the funds within 120 days. This applies if you or your spouse have not owned a principal residence in the last two years.

4. Births or Adoptions

Withdrawals up to $5,000 for qualified birth or adoption distributions within one year of the event are exempt from penalties. This applies to eligible children or adoptees.

5. Emergency Expenses

Starting in 2024, you can take one penalty-free withdrawal of up to $1,000 per year for emergency personal expenses, as defined by the IRS.

6. Disaster Recovery

You may qualify for penalty-free withdrawals related to qualified disaster recovery distributions, limited to $22,000 over the years for any specific disaster.

7. Disability

If you are deemed physically or mentally disabled and unable to engage in gainful activity, you can withdraw funds penalty-free, regardless of the permanence of your condition.

8. Death and Terminal Illness

Withdrawals after the account owner’s death are penalty-free for beneficiaries. This applies only if the funds remain in the inherited IRA, not if rolled into a spouse's IRA.

9. IRS Levies

Withdrawals taken to pay IRS levies against the IRA itself are exempt from penalties.

10. Victims of Domestic Abuse

Withdrawals to a victim of domestic abuse by a spouse or domestic partner, up to $10,000.

Important Note

After age 59½, all penalties for early withdrawals are waived, allowing you to withdraw funds for any reason without incurring the 10% penalty.

For personalized advice on how these exceptions might apply to your situation, feel free to reach out to our team.