Many adults turn to their retirement accounts to cover the costs of life events. However, adults who make early withdrawals from 401(k) and IRA accounts are often hit with a 10 percent penalty that diminishes their savings and jeopardizes their nest egg. There are certain types of events, however, for which adults can make early withdrawals from their IRA accounts without getting hit with penalty. But there are several rules that individuals must follow, so it's important to be aware of them before taking a withdrawal.
Medical expenses can be costly for families, and taking a withdrawal from an IRA is one of the most common ways households cover these balances. In order to avoid getting hit with an early withdrawal penalty, unreimbursed medical expenses must exceed 7.5 percent of an adult's adjusted gross income. However, it's important to keep in mind that adults will still be subject to ordinary income tax on distributions. In addition, individuals who have lost their jobs may also be able to use IRA funds to cover health insurance costs and COBRA premiums. In order to qualify, adults must have received unemployment benefits for 12 consecutive weeks, all of which must have been received in the year they claimed unemployment or the following year. Further, adults must receive the distribution no more than 60 days after finding a new job.
Individuals can also use up to $10,000 of their IRA to make a down payment on their first home. The funds can be used to buy, build or rebuild a primary home. In addition, spouses who are both first-time homebuyers are both eligible for the $10,000 penalty-free withdrawal, giving them a combined $20,000 allowance. In order to qualify, buyers must not have owned a home within the past two years.
Adults can also make penalty-free early withdrawals if they use the cost to pay for qualified education expenses for themselves, their spouse, children or grandchildren. Qualified education expenses include tuition, books, course materials and fees. Keep in mind that room and board are not covered under this privilege.
Because the rules that govern early IRA withdrawals are strict, individuals who are considering using retirement funds to pay for other costs should consider consulting with a tax preparer beforehand to gauge any additional costs or tax rules of which they may be unaware.
Liberty Tax Service provides computerized income tax preparation and electronic filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.
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Liberty Tax Service is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.
Liberty Tax Service is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.