Ninety six percent of the time, it is wise to adopt an out of sight out of mind mindset when it comes to your retirement accounts. But this article is about the other 4%. When is it ok to withdraw money from your IRA? When does it make more sense than borrowing? How can you avoid being penalized?
First, there are two types of IRAs. The first is a traditional IRA, where you are taxed when you take out the money in retirement. The second kind, a Roth IRA, taxes you on the front end but doesn’t hit you with any taxes when you make your withdraw the money in retirement.
The good news: withdrawals are fair game and penalty free after your 59 ½ birthday, no matter which IRA you choose.
Unfortunately, if you withdraw money from a traditional IRA or Roth IRA before you turn 59 ½, you must pay a 10% tax penalty.
There are exceptions to this rule:
Higher Education: If you pay educational expenses for
- your spouse; or
- you or your spouse’s child, foster child, adopted child, or descendant of any of them.
Educational expenses include: tuition, fees, books, supplies, and equipment required for enrollment. To get into the nitty-gritty, see the chart at the bottom of this link.
This is not limited to a 2 or 4 year degree program but includes any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program, essentially all accredited public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions.
You can withdraw up to $10,000 of IRA funds toward the purchase of your first home. If you’re married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.
Better news: You qualify as a “first-time homebuyer” as long as you (or your spouse) didn’t own a principal residence at any time during the previous 2 years.