Penalties and Exceptions to Early Withdrawals from Individual Retirement Accounts By Ryan Whiteman

There are times when you may find yourself short on cash to cover necessary and often significant expenses, such as unexpected medical bills and home repairs, or helping a child pay for graduate school or the purchase of a new home. While it may be tempting to tap into your retirement savings, it is important to recognize that doing so will result in tax liabilities and potential penalties depending on your age at the time of the withdrawal.

Traditional IRAs

The savings you contribute to a traditional IRA, SEP IRA or SIMPLE IRA, are generally made on a pre-tax basis and allowed to grow tax-deferred until you withdraw the money in retirement. If you take an IRA distribution before age 59½, you will be subject to federal and state income taxes at your individual tax rate plus a penalty equal to 10 percent of the distributed amount. The good news is that you may avoid this penalty when the reason for the early withdrawal is due to any of the following circumstances:

• Birth or adoption of a child (up to a maximum of $5,000 per child)
• Disability or death of the IRA account owner
• Disaster recovery (up to $22,000 for an account owner who sustains economic losses in an area that is designated a federally declared disaster area)
• Domestic abuse victim (up to the lesser of $10,000 or 50 percent of your account balance)
• Emergency family or personal expenses (up to $1,000 per calendar year)
• First-time homebuyer (up to $10,000)
• Health insurance premiums (when an account owner, their spouse or dependents are unemployed for at least 12 weeks)
• Higher education expenses for the account owner, their spouse or dependent children
• Involuntary IRS tax levies
• Medical expenses that exceed 7.5 percent of the account owner’s adjusted gross income
• Military reservists and members of the National Guard called to active duty

Roth IRAs

Unlike traditional IRAs, the contributions you make to a Roth IRA are made with after-tax money that account owners may withdraw for any reason and at any age free of taxes and penalties, provided you owned the account for a minimum of five years. However, earnings withdrawn before the five-year mark could incur both taxes and penalties. For example, if you are age 59½ or older and you take a distribution of earnings from a Roth IRA within the first five years of ownership, income taxes will be applied to your withdrawal. Distributions of earnings taken before reaching age 59½ may also incur withdrawal penalties unless they are due to the death or disability of the account owner or used as a first-time home purchase.

About the Author: Ryan Whiteman is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Miami office at (305) 379-8888 or info@provwealth.com.

Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.

Ryan Whiteman is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions presented herein, as financial advisors of PWA Securities, LLC, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

To learn more about Provenance Wealth Advisors financial planning services click here or contact us at info@provwealth.com

Posted on May 28, 2024