Early Withdrawal

Question: Early Withdrawal from IRA?

I just cannot seem to get ahead of the game and am swimming in debt. I took out a loan which helped with some and even tried debt consoildation but couldn’t afford the monthly payment. I’m thinking of withdrawing money from my IRA (not sure if some or all at this point) to pay off some debt). Is this a good idea? What are the reasons for early withdrawl without penalty?

Answer: If you are under 59 1/2 you would pay a penalty of 10% on the Early Withdrawal of the money from you IRA, and that 10% penalty would be on top of the regular tax you would be paying. There are exceptions to the 10% penalty and here they are:

Exceptions to the Early Distribution Tax Penalties
You do not have to pay the additional 10% tax penalty on your early retirement distribution if you certain exceptions.

Exceptions for Early Distributions from an IRA:

You had a “direct rollover” to your new retirement account,
You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days,
You were permanently or totally disabled,
You were unemployed and paid for health insurance premiums,
You paid for college expenses for yourself or a dependent,
You bought a house*,
You paid for medical expenses exceeding 7.5% of your adjusted gross income**, or
The IRS levied your retirement account to pay off tax debts.

Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan:

Distributions upon the death or disability of the plan participant.
You were age 55 or over and you retired or left your job.
You received the distribution as part of “substantially equal payments” over your lifetime.
You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
The distributions were required by a divorce decree or separation agreement (“qualified domestic relations court order”),

* The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty.

** You do not need to itemize in order to claim the medical expense exception.

If the exception is properly coded in box 7 of your 1099-R form, you do not need to fill out Form 5329. If an exception applies and is not recorded in box 7, then you need to fill out Form 5329.

401K to IRA Rollover – Case Study