Can You Take a Penalty-Free IRA withdrawal?

 By Yann Kostic from the July 2014 Edition

In today’s challenging economy, many people who aren’t yet of retirement age may want to withdraw money from their Individual Retirement Accounts (IRAs.) It’s generally a good idea to keep your IRA assets untouched until you can withdraw them penalty-free at age 59½, but if you need to make an exception, you’ll want to do so while avoiding tax implications, if possible.

The bad news? Typically, an early withdrawal from a traditional IRA is considered income, and taxed at your regular income-tax rate. Additionally, you may get hit with a 10 percent penalty. Depending on your tax bracket, that could add up to more than one-third of your money.

While it’s virtually impossible to avoid paying income tax on the withdrawal, you might be able to avoid the penalty by taking advantage of these exceptions:

• You can withdraw the money penalty-free to cover medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) for any tax year.

• You can also withdraw the money to cover health insurance premiums, but this is only penalty-free if they’re used to pay the premiums for you, your spouse, or your dependents when you are unemployed.

• And you can withdraw the money penalty-free to cover higher education expenses for you, your spouse, child, stepchild, or adopted child.

• Additionally, withdrawals taken as substantially equal periodic payments (SEPPs), which are annuity-like IRA withdrawals you take at least annually, are penalty-free. But, SEPPs are available only under certain circumstances.

Many of these techniques are complicated. For example, in regard to SEPPs, you must continue taking the exact amount of the SEPP for at least five years, or until you reach age 59½, whichever is later. As a result, you should contact your advisor for professional advice before using any of these strategies. He or she can tell you what will work best given your individual financial situation.

Yann Kostic is a Financial Advisor (RIA) and Money Manager with Atlantis Wealth Management, specializing in retirees (or soon to be), self-reliant women and Expats in Mexico. Yann works with TD Ameritrade Institutional (custodian). He splits his time between Florida and Ajijic/Manzanillo in Mexico. Comments, questions or to request his Newsletter “News You Can Use”. Contact him at Yannk@AtlantisWealth.com, in Mexico: (376) 106-1613 or in the US: (321) 574-1529.

Download or view The July 2014 Magazine