When managing your retirement account, it is important to understand IRA withdrawal penalties that might carve a chunk out of your retirement benefits. The Internal Revenue Service is strict about how these accounts must be treated, and if you make a mistake there are no do-overs.
The IRS requires that IRA holders wait until they reach the age of 59.5 before they withdraw money. An early withdrawal penalty of 10 percent is incurred if you take money out of your IRA before you reach that milestone.
One way to avoid IRA withdrawal penalties in this case is to accept an IRA annuity, according to Smart Money. This means that you are asking to receive a fixed amount of money from your IRA on a monthly basis for at least five years, or until you reach the age of 59.5.
This is a dangerous maneuver, of course, because the money taken out of your IRA for the annuity is no longer available to grow interest. You’ll be decreasing your total IRA account by that amount every month, which could jeopardize your retirement income.
There are other early withdrawal penalties you might incur on your IRA. Not only does the IRS require you to wait until you reach age 59.5 to make penalty-free withdrawals, but you must also have had your open IRA for at least five years before you make any withdrawals. In other words, if you open your IRA at age 58, the “magic age” no longer applies.
If you want to avoid these types of IRA withdrawal penalties, it is important to plan ahead. Maintain the same IRA account (using rollovers or transfers, if necessary) so you don’t have to wait beyond the age of 59.5 to take withdrawals.
It is possible to withdraw money from your IRA without penalty if you need the cash for medical expenses that exceed 7.5 percent of your annual salary. According to Forbes, however, you must pay those expenses in the same year you take the withdrawal-otherwise, it is subject to the 10 percent penalty.
Additionally, if the IRS finds out that you used even part of the withdrawal for something other than medical expenses, you will incur penalties as well. Make sure, when making medical withdrawals, that you know exactly how much you will spend and when you will pay it to your physician, clinic, hospital or other service provider.
Avoiding IRA Withdrawal Penalties
I have found that the best way to avoid any retirement account pitfalls, including IRA withdrawal penalties, is to increase your knowledge of the subject. Before you make any decisions about taking money from your IRA, consult a tax accountant or financial adviser who can help you make the best decision for your family.