An IRA stands for Individual Retirement Account. Its primarily used to help people save money for retirement. The funds can grow tax free or be tax deferred. There are three main types of IRA accounts.
Traditional IRA
Contribute money that is tax deductible on tax returns. Earnings can grow tax deferred until you take the distributions in retirement. When these contributions are taken they can be potentially be taxed at a lower rate.
Roth IRA
You contribute money that you have already paid taxes on. Your money still grows tax free with tax free withdrawals during retirement.
Rollover IRA
This is a traditional IRA used for money rolled over from another qualified retirement plan. Some rollovers include moving assets from an employer’s sponsored plan such as 401k or 403b to an IRA.
Here are a few IRA early withdrawal penalty exceptions.
College Expenses
Early withdrawal penalties can be waived if you use the funds to pay for higher education costs. It can be used for you, your spouse, children and/or grandchildren. The total amount you withdraw cannot exceed the total of higher education costs. You can use the distributions on tuition, fees, books and room and board at qualifying institutions. Such as colleges, universities and vocational school. Keep in mind that IRA distributions are regarded as taxable income and could have an impact on eligibility for federal financial aid. Talk to the educational institution or a tax professional for more information.
Medical Expenses
If you don’t have medical insurance or if your expenses are more than what insurance will cover and over 10% of your yearly income, you might be able to take distributions penalty free from an IRA.
If you are unemployed, penalty free distributions can also be taken for Medical Insurance premiums for you, your spouse or your dependents. You must meet the following conditions.
• You have lost your job
• You received unemployment benefits paid by the state for 12 consecutive weeks.
• You received distributions no later than 60 days after you were re-employed
First Time Home Purchases
You can take up to $10,000 ($20,000 for couples) to purchase, build or renovate a first home including closing costs. You, your child, your spouse, grandchild or parent are eligible. The IRS considers first time homebuyers to be anyone who has not purchased or owned a home two years prior to buying a new one. However, if the purchase or construction is cancelled or delayed for any reason the money must be put back into the IRA within 120 days of the distribution to avoid any penalties. A tax professional should be able to give you more information.
Disability
If a medical professional determines you are disabled because of mental or physical reasons and you can’t participate in gainful employment, you can take penalty free distributions from an IRA. The disability must be expected to result in death or deemed to last for an indefinite period, if that is the case money can be taken for any purpose. Check the policies of your IRA when it comes to distributions for disabilities. Some might require proof of a disability, such as a signed physicians’ certificate.
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