In light of the coronavirus, people are struggling to make do. Many are out of a job. Small business owners have had to close their doors for the foreseeable future. Good luck being able to borrow money right now! There is precedent for allowing penalty-free use of retirement funds. If ever there was a case for a hardship IRA withdrawal, now is the time. In the following, we will talk about current hardship IRA withdrawal rules. If you are lucky, you may already be qualified for one.
What is a Hardship IRA Withdrawal?
Generally, you mat take a distribution from your IRA at any time. However, there are tax consequences, and if applicable, penalties involved. For example, if you make an IRA withdrawal before the age of 59 1/2, you will be hit with a 10% early withdrawal penalty. However, according to IRC 72(t), there are certain distributions that are qualified as hardship IRA withdrawals. These distributions are exempt from the early withdrawal penalty.
The reason why this penalty exists is because the IRS wants you to save this money for retirement. You shouldn’t touch retirement funds prematurely, unless you absolutely have to. If funds are withdrawn from an IRA early, and either (1) transferred directly to a new retirement plan or (2) chooses to receive the money, but rolls over the full amount within 60 days, there will be no penalty due. Option two gives you access to your funds, so long as you return it to a new plan within the time-frame allotted.
Additionally, there are certain circumstances the IRS shows leniency in applying the 10% early withdrawal penalties. These are considered hardship withdrawals. Currently, there are about ten instances where this is allowed. Of course, taxes must be paid on any amount withdrawn, however there is no penalty.
Lastly, it’s important to note that Roth IRA contributions can be withdrawn at anytime without taxes or penalties. However, earnings and income gained in the plan will be subject to taxes and penalties if withdrawn before age 59 1/2, unless there is a hardship exception.
List of Current IRA Hardship Withdrawals
While not considered a hardship, penalty-free IRA distributions may begin once you reach age 59 1/2.
Distributions made to a beneficiary or estate when the IRA owner passes.
Unreimbursed medical expenses. Lack of health insurance or medical expenses not covered by your plan may be penalty free. Note: expenses must exceed 7.5% of you annual income.
Health insurance premiums. If you become unemployed, you may take a hardship withdrawal to pay for health care. Certain conditions must be met.
Becoming permanently disabled. If you become disabled and can no longer work, you must show proof to avoid paying the penalty.
Substantial equal periodic payments. You may choose to take equal payments for at least five years or until you reach age 59 1/2, whichever is later.
Qualified first-time homebuyer. There’s a lifetime limit of $10,000 you may withdraw from your IRA towards a house. To take advantage of this, you must not have owned a home in the previous two years. If you are married, your spouse may also withdraw up to the limit.
Higher education costs. You are allowed to withdraw funds to cover college expenses for yourself, spouse, child or grandchild. Eligible costs include tuition, books, room and board, and required equipment.
IRS levy. If you have federal taxes that need to pay off, the IRS may take money from your IRA. This will be considered a hardship distribution and no penalty will be owed.
Qualified reservist. If you are called into active duty for at least 180 days, you have penalty-free access to your IRA funds.
Qualified birth or adoption. Payments of up to $5,000 per birth or adoption will be exempt if made within one year of a birth or adoption of an eligible adoptee. This added withdrawal was added thanks to the SECURE Act.
If you are in one of the situations outlines above, you can certainly take a hardship IRA withdrawal. These exceptions are in place to help out those in dire need of retirement funds. However, will the government expand these rules in light of current events? They should to alleviate the added stress of finances during this difficult time. Waiving the penalty and even allowing taxes to remain deferred is in the best interest of all Americans.
Our clients, our readers and all of the world are in our thoughts. We’ll make it through this and come out the other side a smarter nation. We must all do a part to ensure our financial lives are not ruined by this tragedy. If you have any questions, feel free to contact us @ 800.472.0646.