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Client Profile

Julia’s son is starting college this year. She would like to withdraw money from her traditional individual retirement account (IRA) to pay part of his first tuition bill but is worried about the 10% penalty tax.

In most instances, a person who hasn’t reached age 59½ and who makes an early withdrawal from an IRA will face a 10% tax penalty in addition to regular income taxes. However, there is an exception for withdrawals to pay eligible higher education expenses. Although Julia will still have to pay income taxes on her early withdrawal, she will not have to pay the 10% additional tax.

Medical expenses are another exception. Withdrawals for the payment of medical expenses in excess of 10%* of your adjusted gross income may be penalty free. (Other restrictions apply.) Additionally, withdrawals for the payment of medical insurance premiums after you’ve received unemployment compensation for at least 12 consecutive weeks may be penalty free.

First-time homebuyers also may be able to avoid the early withdrawal penalty. Up to $10,000 (lifetime cap) may be withdrawn for the purchase of a first home. The buyer can be you, your spouse, your child, your grandchild, or your ancestor. As long as the buyer (and spouse) did not own a principal residence during the prior two years, the new home is considered a first home.

In certain situations, you may be able to withdraw money from your IRA without penalty. But before you make the withdrawal — and give up the tax deferral on those funds — make sure you’ve looked at all your options.

* Through 2016, the applicable percentage is 7.5% for taxpayers age 65 or older.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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