8 Ways to Access Your Retirement Money Before 59 ½ Without Penalty

 

Troy Sharpe: Following up on last week’s video, we’re going to go a little bit deeper here, and we’re going to talk about the eight ways that you can access money inside your IRA before 59 and a half without a 10% penalty from the IRS.
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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner and professional, certified tax specialist, and also host of The Retirement Income Show. A lot of times we’ll be in a situation where we either need to access money from our IRA prior to 59 and a half, or we didn’t know that we could access money in our IRA prior to 59 and a half and receive a benefit for doing so. By benefit I mean a planning benefit, meaning by doing this or exercising this strategy, we come out ahead. We’re going to hop right into it.

The first one is unreimbursed medical bills. The IRS says, if your unreimbursed medical expenses exceed 10% of your adjusted gross income, you can go into that IRA and take a distribution out and not pay that 10% penalty. You’ll still have to pay income taxes on all of these distributions unless your medical expenses exceed 10% of your adjusted gross income and you also itemize deductions. Without getting too deep here, just talk to your CPA about it, or if you do TurboTax or if you have a financial advisor.

Long story short, if you itemize deductions, one of the itemizations is medical expenses that exceed 10% of your adjusted gross income if you’re below the age of 65. Well, it just so happens that you can also avoid the 10% penalty. If you itemize deductions, and that means you have a lot of deductions, you can possibly avoid the 10% penalty and take money out to cover unreimbursed medical expenses on a tax-free basis, but talk to your CPA about that one.

Number two, disability. The IRS dictates that investors must be totally and permanently disabled before they can dip into their retirement plans and avoid the 10% penalty. The best way to qualify for disability is if you’re on Social Security Disability, or receiving a disability payout from a policy, a disability policy. One thing to note, the Social Security Administration typically denies almost every single claim on the first time. It takes about two years from the last time I checked this to actually get approved for Social Security Disability. It’s just pretty much a rubber stamp no the first time around. If you’re already on disability, you can also go into your IRA, take money out prior to 59 and a half and not pay that 10% penalty.

This is a big one, health insurance premium. Many of us, whether we have lost our job, whether we just didn’t buy a health insurance policy, whatever it might be, we can pay health insurance premiums if you’re unemployed for 12 weeks, that is the caveat here, to help pay your health insurance premium. You can take money out, pay your health insurance premiums and avoid the 10% penalty, as long as you’ve been unemployed for more than 12 weeks.

One thing this article states is that if you do this, it’s probably smart to leave a trail in case you get audited, meaning you open up a separate bank account, you take that IRA distribution, you put it into that bank account and then you use that bank account to pay your health insurance premiums. This way, if the IRS ever asked you about it, very easy and clear to show them that you’ve been above board with this choice.

Upon death. Death, when you inherit an IRA younger than 59 and a half, you do not have to pay the 10% tax for taking it out early. If you owe the IRS. No one wants to owe the IRS, but if you do, you can take a penalty-free withdrawal to help pay those unpaid taxes or whatever the fees are associated. Talk to your CPA about this one as well.

Number six is the first-time homebuyer. A first-time homebuyer is defined as someone who has not owned a home, primary residence in the past couple of years. You can take money out of your IRA, subject to a $10,000 lifetime limit and avoid the 10% penalty and use that money as a down payment towards your home. You could have possibly a 401(k) withdrawal for first-time homebuyer, but you would still pay the 10% penalty on that. If your plan has loan provisions, you have to exercise the loan provision before you can do the hardship withdrawal, and your company may not even allow a hardship withdrawal with a 401(k) plan. Every plan’s summary is different. The summary plan description. This is the document that lays out the rules for your 401(k). Just talking about IRAs, you can qualify, avoiding that 10% penalty.

Number seven, higher education expenses. Tuition, room, board, et cetera, you can take money out of that IRA for you, your spouse, your child for qualified higher education expenses while avoiding the 10% prior to 59 and a half penalty.

Number eight, for income purposes. We did a great video on this last week, but for income purposes, if you’re younger than 59 and a half, you can take money out of your IRA under Section 72(t) of the Internal Revenue Code. There are three ways to calculate this. The amortization method, the annuitization method, and the required minimum distribution method. There is a calculator.

You have to use no more than 120% of the applicable federal midterm rate.

Go back, watch the other video, do a little bit of research online. Talk to your CPA, talk to your financial advisor. If you’re younger than 59 and a half, you have to take income, it’s called a series of substantially equal periodic payments for a minimum of 5 years or until 59 and a half, whichever is longer. If you’re 52, you have to take it for 7 and a half years. If you’re 56, you have to take it for 5 years. Whatever is longer, 5 years or until you’re 59 and a half.

Now I’m going to give you a bonus one here. It has nothing to do with IRAs, but if you sever from service, from your employer, post age 55, but prior to 59 and a half, if you leave that 401(k) at your employer, do not roll it over to an IRA, you can take advantage of what’s known as the Age 55 rule. This just simply means if you sever from service post age 55, but prior to 59 and a half, if you leave your 401(k) behind, you can take money out of it for income to live off. You’ll still have to pay taxes, but you will avoid that 10% penalty.

That was eight ways to access your money prior to age 59 and a half inside those tax-infested retirement accounts. We focused primarily on IRAs, but I did give you the bonus for the 401(k)s to access that money without a 10% penalty. As always, subscribe to the channel, hit that bell icon so we can keep you well connected to your money, and comment down below. I’d love to hear what you say. If you’ve taken advantage of these before or maybe you didn’t know that these were options or choices, let me know.
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