One of the biggest differences between individual retirement accounts and traditional pension plans is that the IRA account holder has a much greater level of control over their retirement future. This control applies not only to how much you choose to deposit into your retirement account each year, how those funds are invested, and when to start making withdrawals from your account.
One common misconception about IRAs is that the money in your account is not accessible until you reach retirement age. In fact, you can withdraw money from your IRA at any time – the biggest issue is that if you make any such withdrawal before you reach age 59½ you’ll have to pay a 10% penalty on the amount of the withdrawal (plus any taxes that would otherwise be due on the withdrawal amount).
Fortunately, there are a few instances in which you can make an early withdrawal without having to pay the 10% penalty:
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Qualified Educational Expenses. You are permitted to take penalty-free early withdrawals from your IRA in order to pay for “qualified educational expenses.” Qualified educational expenses are defined to include tuition, room and board and other necessary expenses for attending a qualified educational institution (which is generally defined as a college, university, vocational school or training center that’s eligible to participate in federal financial aid programs). The withdrawals may be used for the benefit of the account holder or their children or grandchildren, and there is no cap on the qualified amount that may be withdrawn.
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Expenses For a First-Time Home Buyer. You are permitted to take a penalty-free withdrawal for up to $10,000 in order to purchase your first home (or if you haven’t owned your own home for the past two years). You can also use this provision for the benefit of your children or grandchildren if they’re purchasing a first home. The $10,000 is a lifetime cap on all withdrawals pursuant to this provision.
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Unreimbursed Medical Expenses. An IRA account holder is permitted to take penalty free early withdrawals from their account to pay unreimbursed medical expenses for themselves or a member of their immediate family, to the extent that those expenses are greater than 7.5% of the account holder’s adjusted gross income.
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Medical Insurance Premiums. When you’re unemployed (defined to mean that you’re receiving federal or state unemployment compensation for at least twelve consecutive weeks) you can use funds from your IRA to pay your medical insurance premiums, and to pay for your family’s coverage as well.
In each of the exceptions listed above, you’ll still have to pay taxes on the amount of the withdrawal. In addition, if your IRA is set up as a Roth account, then the early withdrawal of funds must have been on deposit in your account for least five years.
Finally, because the investments within your self-directed IRA might be relatively illiquid, you should take care to plan in advance how you’re going to free up the funds for withdrawal.
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