Using IRA funds early


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Questions about IRAs

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Yes, you can avoid penalties for early IRA withdrawals—in some cases.

Ideally, no one would have to tap into their retirement accounts until they retire. However, the past year has been anything but ideal and using funds from an IRA is one way for some folks to keep financially afloat. If you’re thinking of withdrawing IRA funds early, here’s what you need to know about penalties and when they can be avoided. As always, please consult your financial advisor or tax professional on what might be best for your particular situation.

The general rule

The government’s rules on IRAs are designed to encourage people to save for retirement, so if you withdraw funds before you reach age 59½, there is usually a 10% penalty. That’s in addition to the income taxes that will be owed. But in some circumstances, you can avoid the penalty.

Penalty-free uses for early IRA withdrawals

The IRS allows early IRA withdrawals without penalty if you:

  • use the funds to pay medical insurance premiums if you’re unemployed
  • use the money for unreimbursed medical expenses that are more than 10% of your adjusted gross income
  • become permanently disabled
  • use the money to pay for qualified higher education expenses
  • buy or build a home for the first time; a $10,000 limit applies, but if you’re married, each spouse can tap $10,000 from their own account for a total of $20,000
  • receive Substantially Equal Period Payments (SEPP)
  • inherit an IRA
  • are a military reservist called to active duty
  • use the money to satisfy a levy issued by the IRS

When you’ll pay a penalty

If you withdraw IRA funds early and spend them on anything but the uses listed above, you’ll owe a 10% penalty.

Rules are different for Roth IRAs

You’ve already paid income tax on money deposited in a Roth IRA, so government rules are different for these funds. With a Roth, you can withdraw contributions—but not earnings—at any time without taxes or penalties.

A special allowance for 2020

The federal bill providing economic stimulus in response to the coronavirus pandemic allows withdrawals of up to $100,000 from both traditional and Roth IRAs without penalty in 2020. We don’t know if this allowance will continue in 2021.

Keep good records

If you opt to use traditional IRA funds early for an approved use, you’ll need to document how the money is used in order to avoid penalties.

Deciding if an early IRA withdrawal is right for you

Even if you can avoid penalties for an early IRA withdrawal, you’re reducing how much money you’ll have in retirement. Consider other alternatives and take advantage of Consumers services for more input. We’re here to help you understand all the options.

Consumers provides banking services for more than 100,000 members. If you have banking questions, call us at 800-991-2221. We make it easy to bank how you want, when you want.

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Questions about IRAs

Our team is ready to help you answer all your IRA questions.

Reach out

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