Podcast: 10% Penalty on IRAs

Penalty on IRAs

Written by Jeff Dvorachek

July 1, 2022

IRAs and other retirement accounts are intended to help fund a person’s retirement. But sometimes, circumstances dictate the need for those funds. Taking money out of IRA’s should be the last resort, since the distribution can come with a heavy tax penalty.

THE PENALTY IS 10% CORRECT?

  • True – not only the penalty, but you will also have to pay income tax for federal and state.

BUT THERE ARE WAYS THE PENALTY CAN BE AVOIDED CORRECT?

  • Yes – the penalty does not apply to anyone age 59 ½ or older.
  • The penalty also does not apply if you meet one of the exceptions.

WHAT ARE THE EXCEPTIONS?

Some have been around for a long time as well as some new ones.

  1. First time home purchase –
    • Someone who has not owned a home in the last two years
    • Up to $10,000
  2. Qualified higher education expenses
    • Tuition, fees, books, required equipment
  3. Pay for health insurance while unemployed
  4. If you are disabled
    • Strict requirements and not easy to meet
  5. For unreimbursed medical expenses over 10% of your adjusted gross income.
    And tax levies – not tax debt – IRS has to have levied assets

LAST WEEK WE TALKED ABOUT INHERITED IRAs BEING TAXABLE?

  • Yes, they are taxable, but in most cases are not subject to the 10% penalty on any withdrawals.

DON’T THEY NORMALLY WITHHOLD TAX ON THE DISTRIBUTIONS?

  • Yes, but usually it does not cover the entire amount of the tax and penalty, so be careful.

WE ARE RUNNING OUT OF TIME, SO ONE LAST QUESTION, IF YOU TAKE A DISTRIBUTION CAN YOU CHANGE YOUR MIND AND PUT IT BACK?

  • Yes as long as it is done within 60 days.

Be sure to talk to a tax professional if you have any questions about taking money out of IRAs.

Share This Article
Jeff Dvorachek
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.

GET connected. STAY connected.

Read More Like This