4 ways to raid IRAs penalty-free

Usually, you have to pay a 10% early withdrawal penalty tax on the taxable portion of traditional IRA withdrawals taken before age 59½, on top of the regular income tax you owe.

Strategy: Take advantage of tax law exceptions for “raiding” an IRA. Here are four prime examples.

1. Take separate, but equal, payments. No early withdrawal penalty is imposed if you receive “substantially equal periodic payments” (SEPPs) based on your life expectancy or joint life expectancies of you and a designated beneficiary. The payments must last for at least five years or until you turn age 59½, whichever comes later.

Tip: The IRS has approved three methods for computing payments.

2. Heal your financial woes. If you’ve been hit with an unexpected medical bill, you may not have all the cash you’ll need. IRA withdrawals used to pay medical expenses are exempt from the penalty tax to the extent the expenses qualify for the itemized deduction for medical expenses. For 2018, the threshold for deducting medical expenses is 7.5% of your adjusted gross income.

Tip: Similarly, if someone loses their job, pre-age 59½ withdrawals are exempt from the penalty if the money is used to pay for health insurance if unemployment compensation is received for at least 12 consecutive weeks.

3. Unlock tax break for homeowners. You don’t have to pay the penalty if funds are used for first-time homebuyer expenses. For example, you might pull out money from the IRA to help your child buy a home. Even though you’re not the homeowner, the withdrawal still qualifies if the home is your child‘s principal residence and he or she hasn’t owned a home within two years. Alternatively, you might qualify.

Tip: Unlike the other exceptions, this one has a lifetime dollar cap of $10,000.

4. Pass the test for education expenses. Do you need help paying for your child’s college education? If funds are withdrawn for qualified expenses, the distribution isn’t subject to the 10% penalty tax. This includes tuition, books, supplies, etc.—even room and board if your child is a full-time student.

Tip: Comparable exceptions apply to early withdrawals from 401(k)s and other company plans.