Rules for Cashing IRAs With No Penalties

by Don Rafner

If you need extra money to pay for college tuition or to make your monthly mortgage payments, you may consider getting this money from your traditional IRA. Be careful, though. If you want to avoid facing a heavy penalty, you'll have to follow certain rules when withdrawing dollars from your IRA.

Your Age

The easiest way to avoid paying any penalties on the dollars that you withdraw from an IRA is to wait to cash-in your account until you turn 59 1/2. If you withdraw money earlier than this, the government considers the move an early withdrawal. Then, in addition to paying normal taxes on an IRA distribution, you'll also face a penalty of 10 percent on the amount of money that you withdraw.

The Home-Buying Exception

The government does give you an exception, though, if you are withdrawing money from your traditional IRA to purchase your first home. In such a case, you can withdraw up to $10,000 from your IRA without facing the 10 percent penalty even, if you do withdraw these dollars before you turn 59 1/2. Remember that you'll still have to pay taxes on your withdrawal according to your normal income tax bracket. The government considers you to be a first-time buyer as long as you haven't owned a home in the last two years. This means that you could be purchasing the second or third home in your lifetime and still be considered a first-time buyer. If you're married, you and your spouse can withdraw a total of $20,000 from traditional IRAs without facing a penalty.

The Education Clause

The government also allows you to make a penalty-free early withdrawal from your traditional IRA if you plan to use the money to help fund the costs of higher education. You can withdraw IRA dollars penalty-free for yourself, your spouse, children or grandchildren, as long as the money is used to cover tuition, books, room and board, supplies or other education expenses for an accredited post-secondary institution.

Hardship Exceptions

If you're facing a serious hardship, you might be able to withdraw money from your IRA without paying the 10 percent penalty. The government allows you to take out penalty-free money from your account to pay for excessive non-reimbursed medical expenses, the costs associated with total and permanent disability and the payment of medical insurance premiums when you are unemployed.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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