I could use some cash but my only savings is in an IRA. I’m 55 and hear there is an exception to the 10% penalty for taking money out before 59½ once you reach age 55 but I cant find anything on that except for 401(k)s. Can I or can I not get money out of my IRA without penalty?
The age 55 penalty exception only applies to qualified retirement plans such as 401(k)s and only to those who separate from service. There are other circumstances that allow for distributions from IRAs without penalty prior to age 59½. Many of these also apply to retirement plans but not all. Below are the 11 exceptions that have been on the books for years that apply to IRA accounts. Maybe one will apply to you.
- You are the beneficiary of a deceased IRA owner. (Note: Surviving spouses under age 59½ that roll their deceased spouse’s IRA into their own IRA are NOT exempt from the 10% penalty unless one of the below applies.)
- You are totally and permanently disabled. (Generally, a physician must determine that you cannot do ANY substantial gainful activity and your condition is expected to end in death or continue indefinitely.)
- You have unreimbursed medical expenses that are more than 7.5% of your AGI. (This sounds like the qualification to deduct expenses on Schedule A but you do not need to itemize to use this provision to avoid the penalty.)
- The distributions aren’t more than the cost of your medical insurance due to a period of unemployment. (You must receive unemployment compensation)
- The distribution is made under a series of Substantial Equal Periodic Payments
- The distributions aren’t more than your qualified higher education expenses. (Generally, tuition, fees, books, supplies, and equipment required for a student at an eligible educational institution. The education must be for you, your spouse, or the children or grandchildren of you or your spouse.)
- You use the distributions to buy, build, or rebuild a first home. (Maximum distribution exempt from penalty is $10,000)
- The distribution is due to an IRS levy of the IRA or retirement plan.
- The distribution is a qualified reservist distribution.
- The distribution is a qualified birth or adoption distribution. (Maximum $5,000 per birth or adoption)
In addition to the above, new penalty waivers with effective dates over the next several years were created in what many refer to as Secure Act 2.0. This is a portion of the Consolidated Appropriations Act 2023 which was signed into law on Dec. 29, 2022. The two that go into effect now are for “Qualified Disaster Recovery” and an exemption for those taxpayers meeting the definition of “terminally ill.”
Read: What you need to know now about Secure 2.0
I only highlighted a few of the details or qualifications today. There is more, much more in some cases, to each of the above penalty exemptions. Additional details can be found in Publication 590 but I recommend discussing the matter with your adviser before initiating a distribution.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.