Withdrawal Penalties

IF YOU WITHDRAW money from a retirement account before age 59½, you typically have to pay both income taxes and a 10% tax penalty. But there are some situations where the penalty wouldn’t apply:

• Distributions made after your death.
• Distributions made after you become permanently disabled.
• Withdrawals from an IRA to pay higher-education expenses. These withdrawals can hurt financial aid eligibility, a topic discussed in the college chapter.
• Withdrawals of up to $10,000 from an IRA to buy a home. The $10,000 is a lifetime limit, and the provision can be used only by those who haven’t owned a house within the past two years. Are you married? Together, you could withdraw $20,000.
• Withdrawals of up to $100,000 if you’re the victim of an officially declared disaster, such as a hurricane.
• Distributions made as part of a series of substantially equal periodic payments over your life expectancy. If these distributions are from an employer’s plan, you need to have left your job. Be warned: Calculating your annual withdrawal can be complicated.
• Distributions to pay deductible medical expenses that exceed 10% of your adjusted gross income.
• Withdrawals of up to $5,000 to pay for adoption or child birth expenses.
• Withdrawals from an IRA to pay health insurance premiums while unemployed.
• Distributions from an employer’s retirement plan made after you left your job at age 55 or older.

These exceptions to the penalty apply to both traditional and Roth accounts. But with the Roth, you may also avoid income taxes if you’re under age 59½, though only in a few carefully defined scenarios, such as when withdrawing your regular annual contributions or when withdrawing the sum converted to a Roth after meeting the five-year rule.

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