Can I Tap into My IRA Early?


IRA are Individual Retirement Accounts that are designed to ensure that you have money saved up for the days after you retire. Sure, you’ll likely be able to get Social Security benefits every month because of the money that you paid into it your entire work life. However, that might not be enough for you to live comfortably and stress-free. That’s why many people establish IRAs.

Instances might arise in which you’re strapped for cash and need to dip into your IRA funds. Of course, IRA funds are not designed to be tapped into, so you’ll incur penalties for doing so. Taking money out of an IRA account before you’re supposed to is rarely a good idea, but if you’re in an emergency situation, and it can’t be avoided, there are steps you can take to minimize the penalties that you’ll incur.

Substantially Equal Periodic Payments

Typically, if you’re younger than 59 ½ years old and want to take money out of your IRA, then you’ll be charged a 10% early-withdrawal tax penalty. An example of when a person might need to take out SEPPs include if he or she becomes unemployed. The IRS does allow younger account holders to escape the penalty, though, if they agree to withdraw Substantially Equal Periodic Payments, also known as SEPPs. SEPPs have to be withdrawn for five years or until you turn 59 ½. This is known as the 72(t) strategy. Some of the disadvantages to this tactic include the following:

  • If you violate any of the rules, huge penalties could apply.

  • You cannot initiate new withdrawals during the period.

  • You cannot make any new contributions to the IRA during the period.

  • Distributions will be taxed at your regular income tax rate.

Higher Education Expenses

The government will allow you to withdraw funds from your IRA without any penalties whatsoever if the funds are going towards qualified higher education expenses for yourself, your spouse, your children or your grandchildren. However, in order for no penalties to be assessed, the educational institution must be approved by the IRS. It can be a public, private or nonprofit institution as long as it is a college, university, vocational school or other postsecondary institution that meets the IRS’s criteria for approval. Once enrolled in the school, IRA funds may be used to pay for the following:

  • Tuition and fees

  • Books, supplies and other educational-related expenses

  • Expenses for special-needs students

  • Room and board (if the student is enrolled at least half-time)

First-Home Exemptions

The government will also allow you to tap into your IRA funds if you’re using them to purchase your first home. There are various tax breaks for homeowners, and one of them is that you’re allowed to put $10,000 of your IRA funds towards the purchase of your first home.

If you’re married, the amount that you and your spouse can put towards it from your IRAs is $20,000. However, this doesn’t necessarily have to be your first home. The IRS has a certain definition for a first-time homebuyer, and as long as you meet that definition, you can be penalty-free. Under the tax rules, you qualify as long as you didn’t own a principal residence during the past two years. You should be careful when you withdraw the funds, though, because you must use them within 120 days to pay all the acquisition costs.

Generally, it is not a good idea to tap into IRAs, but certain situations might arise in which it is necessary or advantageous for you to do so. The IRS makes accommodations for some situations and eliminates or lessens the penalties.

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