Making withdrawals from retirement accounts before actual retirement is usually a last resort. Individuals fear penalties and taxes—expenses they were not anticipating when they took the financially responsible step to contribute to their retirement. In addition to potential penalties, withdrawing funds early means they may not be accessible when intended: Retirement.
- Emergency loans. Federal law allows an individual the option to open a 60-day loan on their Traditional IRA once annually. This loan must be paid back within the 60 days. If the individual does not satisfy the loan they will incur taxes and penalties. Taking a loan out on a traditional IRA will affect its growth. Consider the true financial risks associated with the emergency situation. Comparatively, the risk in the IRA’s value loss may be worth it. Review long-term effects with a tax advisor to be certain.
- Medical emergencies. Traditional IRAs offer conditional access for medical emergencies:
* The Disability Act permits withdrawals if a medical doctor has verified disability and the individual is not able to work.
* Those who have collected unemployment benefits for more than 12 months may withdraw penalty-fee funds from their Traditional IRA to cover the cost of health insurance.
* When medical expenses exceed 10% of an individual’s adjusted gross income, withdrawals may be made to cover the costs of healthcare.
- Between age 59 ½ and age 70 ½. Starting at age 59 ½, withdrawals may be made penalty-free. If other income or investment accounts are supporting an individual’s lifestyle at the time, there may not be a need to draw from the traditional IRA. However, withdrawals are mandatory starting the year after one attains age 70 ½. Since income tax rates are unpredictable, it is impossible to gauge whether withdrawals earlier or later will have lower tax implications, but for most people it is advantageous to wait as long as possible before taking distributions.