When paychecks start to dwindle, and the overall household income doesn’t cover emergencies like major car repairs, home repairs, or helping a family member with a financial emergency. Some will look to their Roth IRA as a safe haven for just those times, but it could be a financial disaster upon withdrawing the funds. The Roth IRA penalty for withdrawing funds early can cost hundreds or even thousands more than taking out a personal or signature loan at your local lending institution. Before you act, call your financial planner and ask them to give you a report on the exact cost of the withdrawal. The answer will never be a good one, but may be something you can live with if the situation dictates you press forward.
However, there are exceptions to this rule:
- First time homebuyers are allowed a ten thousand dollar exception. This is a one shot deal for the lifetime of the account.
- Happens because of the IRA owner’s disability. This is not left up to your interpretation as the IRS has strict guidelines in this area. Ask your tax advisor and financial planner first.
- Is used to pay for un-reimbursed medical expenses that exceed 7 1/2% of the AGI.
- Paying monthly installments to the IRS for back taxes and penalties, because of an IRS charge placed against the Roth account.
- If the account holder has been unemployed and receiving unemployment benefits for twelve weeks, then medical expenses can be withdrawn.
- Used to pay for college for the account owner or qualified members of their household.
- The death of the Roth IRA account holder.
Other than the above listed exceptions you can pay up to five hundred dollars in penalties on withdrawing as little as fifteen hundred dollars.
Exhaust every avenue for borrowing money before you go down this path, as you can destroy in a short period of time, what took you so long to build. Try borrowing against your life insurance policy, vehicle that is paid off, or even a small second mortgage on your home before being tempted to ruin your retirement plans. New laws are constantly being added to the IRS guidelines concerning IRA accounts. They add and take away exceptions as well, so always get answer from your tax accountant before making any financial decisions that could have you working well into your eighties just to keep food on the table and the lights on in your home.