Unlock Your IRA: How to Cash Out an IRA Without Penalty

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Unlock Your IRAIn general, cashing out an IRA is a bad idea. That being said, and I think I’m contractually obligated to mention that as a personal finance blogger, there are times when you simply have no choice. When faced with certain decisions, you might have to make a few that you know are bad for the long term but necessary for the short term. To cash out an IRA may be one of them.

So, if you are faced with such a decision, I think it’s important that we review how you can cash out an IRA and avoid the 10% penalty. It will not be possible for you to avoid paying taxes on the withdrawal, since you never paid taxes when you contributed, but we can at least try to avoid the ugliness of the 10% penalty.

Qualified Educational Expenses

As long as you pay for “qualified educational expenses” for you, your spouse, your children, or your grandchildren, it’s safe. It needs to be a qualified institution, which means the IRS has to approve, and it can be public or private, as long as it’s accredited. Qualified educational expenses include tuition, fees, bucks, supplies, and anything else that falls under the category of requirement equipment. If you’re enrolled at least half-time, room and board count too.

First Time Home

You can use up to $10,000 of your IRA towards the purchase of your first home. If you are married and you are both first time homebuyers, you can withdraw $10,000 each for a total of $20,000. The slick thing about first time homebuyers is that the IRS considers you a first time homebuyer if you haven’t owned a home in the previous two years, which is probably a lot looser than you thought. Also, you can withdraw the funds to help your children, grandchildren, or parents in addition to yourself (and spouse).

Hardship Withdrawals

The first two rules probably don’t fall into the category of “you have no choice.” But the “hardship widthdrawal” rules do and fortunately for you, the rules are more lax when it comes to an IRA. With a 401(k), hardship rules are a little stricter because you’re still dealing with an employer. With an IRA, the government is still getting their tax revenue so it’s a little less stringent.

So what counts as a hardship? Here are some common ones:

  • If you use the funds to pay for un-reimbursed medical expenses that are greater than 7.5% of your AGI,
  • If you become disabled before 59.5,
  • If you agree to take equal distributions from your IRA over your life expectancy, according to the official IRS calculation method.

So, if you are going to cash out an IRA, try to make sure it’s for one of the three categorical reasons I listed above or the IRS is going to take yet another bite. If you’re withdrawing it because of hardship, don’t let the IRS make it even harder!

(Photo: stebulus)

{ 44 comments, please add your thoughts now! }

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44 Responses to “Unlock Your IRA: How to Cash Out an IRA Without Penalty”

  1. These days it seems so many more withdrawls are happening because of debts and job losses. Not the best handling of tax sheltered money from a pure financial standpoint, but in a survival moment you do what you have to do. Seems to be more typical on retirement accounts under $10,000.

    Downside is the nasty tax bite the following April. I’m sure most people do this under the assumption that finances will have improved by the time the taxes have to be paid. If not, you could be in worse shape than before the withdrawl if the money is already spent.

    • Just broke says:

      Would needing the money to save my home be considered a hardship?
      I hold a IRA Annuity and it has matured, but the withdrawl window is 7 months out.

      • Andrew says:

        This would be a question for a lawyer, not an internet forum, but you might be better off just waiting the seven months. Banks are notoriously slow to foreclose these days. Alternatively, you might be able to borrow against the IRA. If you do have to withdraw, just withdraw enough each month to pay the the mortgage and leave the rest in there. Finally, if you’re under water on your loan, and you live in a non-recourse state such as California (again, check with a lawyer), just walk away.

  2. Korwin says:

    72T is also an option…

  3. LB says:

    You can also withdraw the principal (not the earnings) on your Roth IRA sans penalty at any time.

    • Lord says:

      But you can’t withdraw principal separate from interest as the balance must be prorated and you can’t do it before 59 1/2 without one of these.

      • WantIra says:

        Lord said on
        Tuesday – 08/18 at 4:57 pm

        “But you can’t withdraw principal separate from interest as the balance must be prorated and you can’t do it before 59 1/2 without one of these.”

        Can you elaborate that?
        If I have got a ROTH IRA, I know the principal amount that went in. What is the catch you are mentioning about interest that is tied to the principal?

  4. dilbert69 says:

    Actually, the reason you’ll pay tax is because the earnings (if any) are taxable. I DID pay tax on my IRA contributions because I earn too much to deduct them.

  5. freeby50 says:

    Equal distributions are not really a hardship category. You can use an annuity or a 72(t) rule distribution to withdraw equal amounts from an IRA over many years. Its basically for doing early retirement.

  6. Mike says:

    If you know or suspect you will be taking an early withdraw from your 401K or IRA in the future but not immediately you can avoid the penalty by converting your account to a Roth IRA and waiting for more than 5 years to withdraw the money. You do not have to be 59 1/2 to do this. Here’s how it works:

    1) Convert a 401K or IRA to a Roth IRA and pay the taxes in the year of the conversion.
    2) After 5 years the converted amount can be withdraw penalty free and without additional taxation (you’ve already paid the taxes during the year of conversion).
    3) Any earnings accrued during this time are still subject to tax and penalty if you are younger than 59 1/2 but when you withdraw the money these are always considered to be the last dollars removed from the account.

    This can be a useful method if you’ve built up a large IRA or 401K and find yourself temporarily in a lower tax bracket because of job loss or starting a new business. You do need money to pay the taxes when you convert but you do not have to convert all your money at once. Each time you convert an amount you must wait five years to withdraw that amount penalty free but the withdraws come out on a first-in/first-out basis.
    I did this about 8 years ago when I took a buyout from my employer and had a 401K balance that I knew I might want access to at some point in the future before I was 59 1/2. By converting money to a Roth IRA over the first few years when much of the money was taxed at the 15% rate I now find myself with a Roth balance on which all taxes have been paid and which are not subject to penalty IF I wish to withdraw them. It may not be useful for everyone but this provision is not well know to most people.

  7. GMAN says:

    Does paying off college loans count for qualified educational expenses?

  8. Rick P says:

    Under section 72T of the IRS code, the 10% early withdrawal penalty can be avoided if withdrawals are made from a traditional IRA account in equal installments for a minimum of five years provided the account owner is at least 55 years of age or for any number of years if the account owner is at least 59 1/2 years of age.

  9. Robert Veale says:

    Does an annuity qualify as a Traditional IRA?The

  10. Patrick says:

    The $10,000 for first time homebuyers works better with a Traditional IRA than a Roth IRA. Unless you buy your first home late in life, it’s hard to build up that much earned interest that makes it worth withdrawing your money from a roth for a first home. It’s always good to know these exceptions in case an emergency does happen and you do need the funds.

  11. cporter says:

    What if your mother died and you are left paying the mortgage? It’s placed a extreme hardship on me, and it’s the only home (residential, I do have a trailer) I’ve owned.

    • dilbert69 says:

      If you’re an adult and still living with your mother, you’ve got bigger problems than paying the mortgage.

      • FU says:

        Don’t sound like such an ass. There is nothing wrong with living with your mom as an adult. What if mom has cancer and he/she is taking care of her? What if she is a widower? What if the adult living at home is handicap?

      • John says:

        Here’s hoping that life never throws you a fastball you can’t hit. I was struck with a disability and was once of a mindset just like you have now. Show some compassion for others in this difficult time. 0bama hasn’t made it any easier. He’s the reason for much of today’s financial woes.

  12. lika says:

    don’t think she could be a widower…..

  13. Toots says:

    I must comment to poor Dilbert who seems to like giving “cheap shots” behind the internet. Ah yes, poor Dilbert actually “believes” that somehow living with parents implies a person has “problems”. Ah what a poor misguided (and inexperienced) soul he must be.

    Let me give him a clue…on behalf of adults living with parents. I’m single and have been living with my parents for 25+ years. I have an excellent job (six figure income) and have been with the same Corporation for 30 years. I’ve also had the fabulous ‘rare’ opportunity to save a lot of money and have made a small fortune doing so …in spite of the economy. I’ve also been able to “give generously” to many charities and financially help my parents and immediate family members in ways that would never have been possible otherwise. Life is very good and I know I’m extremely fortunate.

    Thanks to my patience, I can pay “cash” (if I choose to) for a really nice “trophy” house – not to mention I’m completely debt free and “set” for life financially.

    Dilbert’re right though…I DO have my problems… problem is ‘what to do’ with all the money that I’ve saved and how to spend it!! Oh well…such are the problems of an adult who lives with parents. 😀

    • Blob says:

      Good looking out toots

    • Laura says:

      and you get the benefit of being with your parents and knowing them. The nuclear family did not really begin until way after WW2. Before that, it was a very common practice for different generations of families to live together. I think it’s great! My parents live in Fl. I live in the Great North Woods. I get to see them about once every 2 yrs. It sucks! They’re in their 70’s and won’t be around much longer.

    • Frank says:

      Oh, come on. You sound like a real looser to me!!

  14. Andrew says:

    I never said adults who live with their parents have FINANCIAL problems.

  15. Jolie says:

    Cash my IRA to pay my bills, when come to tax time for 2010 and will get all back in the form of return fund.

  16. Martha says:

    I also would like to cash our my IRA to pay off bills. I am unemployed and am having a hard time.

  17. Anonymous says:

    What would it cost in taxes to take your IRA and deposit it in your savings account. Is it 10% of what your total IRA balance. we are in our 70’s. Thanks

    • Andrew says:

      Why would you do that? Why not just take distributions from it? That being said, you should address tax questions to an accountant or tax expert, not the internet.

      • Blob says:

        I want to cash my IRA out also. But I think Andrew may be right. My IRA is only worth 4k, but I may get a job soon ?? maybe not. This stock market is scary right now. I will run out of cash in 2 months and lose my place. Undecided still…

  18. Eric says:

    Parent died, I want to cash out the traditional Ira he had. Any loop holes as a benefiary? What do I expect if I take this money in the form of what i would have to pay in taxes?

  19. Laura says:

    What if my spouse becomes disabled? Will this qualify? In Wisconsin we have laws that make the IRA mine too. We need to take money out but everything I read says if “you” become permanately disabled. I am, but my husband whose name the sarsep is in, is not.

  20. DanO says:

    Toots – You call living with Mom and Dad for 25 years a life. You missed your life for the last 25 years. Frankly, money doesn’t buy it all. Your parents obviously babied you for way too long. You lost your life my friend. In the end, you have nothing. You have many more problems than ‘What do do with all your money’.

  21. Brent says:

    How do we find out if the online university (Regent University) that my wife got her degree from and we are now paying the loan for – qualifies thru the IRS for cashing out my IRA early to pay it off??

  22. LeRoy says:

    What about cashing in an IRA left by a parent?
    I was told by the banker that I had to pay taxs
    But I read I don’t have to because it was left to me. Any help? Thank you!!!

  23. Frank says:

    Nothing wrong really living with your parents later in their lives, just as long as you are with them to help them and not just to help yourself. Too many parents dying home alone nowadays with no kids around to give a r.a.t.’s ass about them. What goes around comes around and some day will be our day also.

  24. Trish says:

    Are you people kidding me? I was reading through these posts and am just in disbelief about families living together. I am 53 y/o and have shared a house with my parents for the last 13 years following a nasty divorce where my “beloved” ex decided to foreclose on our home at the time. My parents are in their 80’s now and live on a fixed income. I work full-time and make a modest income. I pay for the mortgage, the cell phone bill for both phones, the internet and the homeowners insurance which is about $1300 a month. My parents are living on social security plus a little extra from their pensions and IRAs so they pay for the utilities, satellite TV and their supplemental insurance to Medicare. I can’t think of a better arrangement to HELP them out since the cost of their supplemental insurance is over $300 a month AND many of their medications are either not covered OR they have to pay this HUGE out of pocket cost. Am I a loser for helping my parents out at this stage of their lives? HELL NO NO NO. I’m here to help them as they have chest pain and need to go to the ER, I’m here to help them as they lose their eyesight to Macular Degenration and can’t see as well as they used to and I’m here to do the heavy duty yard work they need done. SHAME ON YOU who are so quick to judge that anyone who lives with parents are losers. I bet you didn’t call your Mom or Dad on Mother’s Day or Father’s Day last year. I didn’t have to………..I made them a great dinner at home and we enjoyed our day together. Don’t judge people as losers because they live and support their families.

  25. Tara says:

    What if it a divorce and i need to pull some money out for everyday bills.. Im so confused when it comes to all this and dont want to be taken advantage of..

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