Choosing an early withdrawal from your individual retirement account (IRA) can be a costly move, often resulting in unfavorable consequences such as tax penalties and loss of future growth. In an effort to discourage the early collection of designated retirement money during taxpayers’ working years, Uncle Sam imposes a 10-percent penalty in addition to one’s regular tax bill. A withdrawal made earlier than age 59½ could qualify for such a penalty unless an available exemption criterion is met. The Virginia Society of Certified Public Accountants (VSCPA) offers the following examples:
It’s okay to make an early withdrawal to pay costs relating to higher education for you, your spouse, your children or your grandchildren. These distributions are included in your taxable income and will be subject to regular tax. Since federal financial aid is based on your income situation, early draws have the ability to negatively impact a student’s chances of qualifying for financial aid and even push the IRA holder into a higher tax bracket. As such, you could end up paying more money overall.
First Home Purchase
You can use $10,000 toward the purchase of your first home. If you are married, this amount becomes $20,000 since you may each pull $10,000 from your respective retirement accounts.
The early withdrawal money can be used to meet down payment requirements, pay for groundbreaking costs on new construction and even rebuild your white-picket fence. The timing of the early withdrawal is important, since the IRS requires your funds to be used within 120 days of the distribution. During that timeframe, should you cancel or reschedule the purchase or construction project, the money can be returned to your IRA without penalty.
You can use your IRA for medical expenses. The IRS will not penalize you should you need to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income. Timing is again important as early withdrawal money for medical expenses must be utilized in the year the medical expenses are incurred.
Finally, withdrawals made following a period of unemployment are acceptable if used to pay for health insurance for you, your spouse or your dependents.
Your local CPA can help you understand your money management issues. Be sure to contact him or her with all of your financial questions and concerns.