The IRS considers “retirement age” to be 59 and a half years old for the purposes of IRA withdrawals. Even if you aren’t retired, you are allowed to withdraw money from your account for any reason, and without penalty, after you’ve reached this age.
However, there are several situations where you can take money out of your IRA penalty-free, even before you reach this age. Here are the most common, and whether it could be a smart idea to take advantage of each.
First-time home purchase
The IRS allows a one-time early withdrawal from your IRA to put toward a first-time home purchase, in an amount of up to $10,000. And it’s important to mention that it doesn’t have to be a home purchase for you. In other words, if you want to use your IRA funds to help your child buy their first home, you can use the withdrawal exception for this reason.
While it’s generally a smart idea to leave your retirement funds invested for as long as possible, there’s a solid argument to be made that homeownership can be a great “investment” as well, especially from a perspective of building net worth for retirement. In fact, a Federal Reserve report found that U.S. homeowners had a median net worth of $255,000, while the median net worth of a renter is just $6,300. So, if using your IRA is the difference between being able to buy a home or not, it can be a good reason to take money out early.
The IRS allows early withdrawals from an IRA in any amount to pay for qualified higher education expenses.
Whether this is a good idea or not depends on your personal circumstances. In general, financial advisors suggest taking care of your own retirement needs before using your savings for college expenses. But if you can use your IRA funds without hurting your retirement security, it can be a smart use.
In fact, many Americans who have employer-sponsored retirement plans like 401(k) accounts choose to open and contribute to IRAs just for this purpose. If they end up needing the money, they can simply leave it invested for retirement. But if they are on track to have sufficient retirement savings, they have the flexibility to use their money for college expenses.
Roth withdrawals (for any reason)
One of the perks of Roth IRA investing is that your contributions (but not any investment gains) can be withdrawn at any time, and for any reason. In other words, if you’ve contributed $5,000 per year to a Roth IRA for the past five years, you could potentially withdraw as much as $25,000 without penalty.
Having said that, it’s generally best to think of this as a last resort. If you ever are in a situation where you really need the money, this financial flexibility is nice. But it’s generally not wise to treat your Roth IRA as a way to fund your living expenses.
There are several other reasons why you may be able to withdraw your IRA funds penalty-free, regardless of your age. For example:
- If you become permanently and totally disabled.
- If you use the money to pay medical expenses (over 7.5% of your adjusted gross income).
- If you’ve been unemployed for at least 12 weeks and use the money to pay for health insurance for yourself or your family.
- If you’re a new parent and use the money to pay for birth or adoption expenses ($5,000 max).
- If you withdraw money to pay an IRS levy.
- If you accidentally contributed too much to your IRA and need to withdraw the money.
- If you’re a military reservist called up to active duty.
- If you plan to roll the money into another retirement account.
Obviously, all of these can be good ideas in certain circumstances. For example, if you have to choose between using your IRA funds and not receiving medical care you need, it’s an easy decision.
It’s also worth mentioning that you can technically withdraw money from your IRA at any time if you’re willing to pay a 10% early withdrawal penalty. So, if you are in a financial hardship, you can choose to access your IRA funds.
The bottom line on early IRA withdrawals
The takeaway is that there are a few situations where it can be OK to withdraw money from your IRA before you retire, such as to help buy your first home or to help send a loved one to college, assuming it doesn’t come at the expense of your own retirement security. And it can make sense to tap into your IRA to cover things like medical expenses if the alternative is to use high-interest credit card debt or simply not pay your bills.
The bottom line is that everyone’s financial situation is different. But in certain circumstances, it can make sense to withdraw from your IRA early.
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