I am 55 and need cash. Can I use my IRA without penalty?

Last updated: 18 March 2023 at 14.12 ET

First published: March 17, 2023 at 2:05 PM ET

Dear Dan,

I could use some cash, but my only savings are in an IRA. I’m 55 and hear there is an exception to the 10% penalty for taking money out before 59½ when you reach age 55, but I can’t find anything about that except for 401(k)s. Can I or can’t I withdraw money from my IRA without penalty?

-Sit

Dear…

Dear Dan,

I could use some cash, but my only savings are in an IRA. I’m 55 and hear there is an exception to the 10% penalty for taking money out before 59½ when you reach age 55, but I can’t find anything about that except for 401(k)s. Can I or can’t I withdraw money from my IRA without penalty?

-Sit

Dear Sid,

The age 55 penalty exception applies only to qualified retirement plans such as 401(k)s and only to those separated from service. There are other circumstances that allow penalty-free distributions from IRAs before age 59½. Many of these also apply to pension schemes, but not all. Below are the 11 exemptions that have been on the books for years that apply to IRA accounts. Maybe one will apply to you.

  • You are the beneficiary of a deceased IRA owner. (Note: Surviving spouses under age 59½ who roll their deceased spouse’s IRA into their own IRA are NOT exempt from the 10% penalty unless one of the following applies.)
  • You are totally and permanently disabled. (Generally, a doctor must determine that you cannot perform any substantial gainful activity and your condition is expected to end in death or continue indefinitely.)
  • You have unreimbursed medical expenses that are more than 7.5% of your AGI. (This sounds like the qualification to deduct expenses on Schedule A, but you don’t need to itemize to use this provision to avoid the penalty.)
  • The distributions are no more than the costs of your health insurance due to a period of unemployment. (You must receive unemployment benefit)
  • The distribution takes place in a number of significant equal periodic payments
  • The distributions are no more than your qualified higher education expenses. (Generally, tuition, fees, books, supplies, and equipment are required for a student at a qualified educational institution. The education must be for you, your spouse, or your or your spouse’s children or grandchildren).
  • You use the distributions to buy, build or rebuild a first home. (Maximum distribution exempt from penalty is $10,000)
  • The distribution is due to an IRS tax from the IRA or retirement plan.
  • The distribution is a qualified reservist distribution.
  • The distribution is a qualified birth or adoption distribution. (Maximum $5,000 per birth or adoption)

In addition to the above, new exemptions with effective dates over the next several years were created in what many refer to as Secure Act 2.0. This is part of the Consolidated Appropriations Act of 2023, which was signed into law on December 29, 2022. The two that go into effect now are for “Qualified Disaster Recovery” and an exemption for those taxpayers who meet the definition of “terminally ill”. “

Read: What you need to know now about Secure 2.0

I highlighted only a few of the details or qualifications today. There is more, much more in some cases, to each of the above exemptions. Additional details can be found in Publication 590, but I recommend that you discuss the matter with your advisor before starting a distribution.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ in the subject line.

Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne and Tampa Florida. His comments are for informational purposes only and are not a substitute for personal advice. Consult your advisor about what is best for you. Some reader questions have been edited to help with the presentation of the topic.

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