Q:

Can you make penalty-free IRA withdrawals?

A:

Quick Answer

It is possible to make penalty-free IRA withdrawals. Anyone over the age of 59 1/2 can withdraw funds from their IRA without paying a penalty, pursuant to IRC sec 72(t). In addition, there are exemptions for individuals who meet certain requirements.

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Full Answer

The Individual Retirement Account was created by 26 U.S.C. sec 408 and is controlled by Internal Revenue Code section 72. An IRA permits an individual to invest and save money for retirement without paying income taxes on the gains until the funds are withdrawn. The Internal Revenue Code provides that early withdrawals from an IRA are subject to a 10 percent penalty. The exceptions to this penalty are listed in IRC sec 72(t).

The most famous of these exceptions is the "series of substantially equal periodic payments" exception, according to Getting Your Financial Ducks In a Row. This exception allows for withdrawal of the IRA funds without requiring any special circumstances. However, this exception has very specific and complicated requirements to ensure the withdrawal stays penalty-free.

IRC sec 72(t) also provides for less complicated penalty-free withdrawals under special circumstances. For example, funds may be withdrawn from an IRA without paying a penalty for certain unreimbursed medical expenses and to pay for health insurance while unemployed. IRA funds may also be withdrawn penalty-free if the owner of the account becomes totally and permanently disabled, to pay for qualified educational expenses and to pay up to $10,000 for first-time home buyers.

Before withdrawing funds from an IRA, you should speak to a tax professional to review your specific circumstances.

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