When you have saved money for the future in an individual retirement account, you probably expect to leave that money in the account until you reach retirement age. Sometimes things just don’t go as planned, and you might need to be able to get some of your money to cover an urgent need. Before you do, be sure you know how it works, when you might face penalties and when you can avoid paying extra to use your IRA funds.
Because an IRA is created with the sole purpose of providing money for your retirement, the government has strict rules in place regarding the removal of funds. No matter when you take the funds from an IRA, the amount you get counts as income, and you will have to pay taxes on it that year. The exception to this is a Roth IRA, which does not incur new taxes because it is funded with money that has already been taxed. If you take distribution of funds before you are 59.5 years old, a 10 percent penalty is also assessed, unless you remove the funds to pay for an approved hardship.
The IRS considers using your IRA to pay for school an acceptable use of the funds. The attendee can be yourself, your spouse, your children or your grandchildren, and you can use the money to pay for tuition, books and supplies. If the student attends half time or more, room and board also qualify as permitted school expenses. You can choose any school; private or public, including universities, colleges, trade and vocational schools are acceptable, but the institution must be accredited and approved by the IRS.
If you are a first-time homebuyer, the IRS allows you to withdraw up to $10,000 from your IRA to use toward the purchase of your home. Your spouse can also withdraw $10,000 from his retirement account, giving you a total of $20,000 toward the purchase. The IRS has a liberal definition of a first-time homebuyer, and if you have not owned your primary residence for at least two years, you qualify. You can also use the funds from your IRA to purchase a residence for your spouse, a parent, child or grandchild. If your IRA is a Roth account, you must have had the account for at least five years to avoid paying the penalty.
You are eligible to take your IRA funds without penalty if you have significant unreimbursed medical expenses. This applies even if you have insurance, as long as your share of the expenses is at least 7.5 percent of your gross income. Hardship distribution of IRA funds can also be taken without penalty to pay for the cost of medical insurance, providing you are out of work. This distribution is limited to the total amount you paid for medical insurance during the year.
You are eligible for hardship distributions from your IRA if you are disabled, but you have to prove that you can’t work to avoid the 10 percent penalty. The IRS requires that you submit a doctor’s statement that your condition is going to result in your death or that you are incapacitated for a long and indefinite period of time. If you are disabled you can withdraw your IRA funds in any year, not just the year you became disabled.