The Versatile IRA

By: Horizon Bank Last Updated: May 27, 2014

IRAeggThe IRA, or individual retirement account, has traditionally been used for its namesake — to amass funds to be used during retirement. An IRA can be a fairly flexible vehicle for retirement, for instance allowing you to roll over assets from a previous employer’s retirement plan. Early withdrawals from an IRA are generally taxed heavily by the Internal Revenue Service, once in the form of regular income tax and then an additional 10 percent penalty for withdrawing before age 59 1/2.* But, there are several ways you can use an IRA that do not trigger the age-related penalty associated with early withdrawal (though you may owe income tax on the distributions). These exceptions to the early withdrawal penalty make IRAs a flexible way to save for a variety of life stages.

College costs. An IRA can be used to pay for higher education expenses for yourself, your spouse, your children or your grandchildren without penalty. Note that money used from your IRA for these purposes will count as income in determining eligibility for need-based financial aid.

First-time home purchase. First-time home buyers can use up to $10,000 of IRA assets to buy, build or rebuild a primary home without penalty. For this purpose, first-time home buyers are defined as any individual who has not owned a home in the past two years. Plus, if you and your spouse both qualify, you can each use distributions from your IRA totaling up to $20,000 in distributions together.

Unreimbursed medical expenses. Your IRA can be used to pay unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income without having to pay the 10 percent early withdrawal penalty.

Health insurance for the unemployed. Individuals may also be eligible to withdraw from their IRA penalty-free in the event that they are unemployed. Withdrawals can be used to cover health insurance costs, including premiums paid for COBRA continuation coverage.

Income during disability. Individuals who become disabled and unable to work may be able tap into their IRA. Proof of disability as determined by a physician is required, and your disability must be expected to last an indefinite period of time and prevent substantial gainful activity.

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With any sort of IRA withdrawal, always be sure to weigh the costs as well as the benefits. The IRA is designed to provide long-term growth that may be compromised when early withdrawals are used. Still, there are times when withdrawing from an IRA may be the right move. Speak with a financial expert at Horizon Bank to help determine if early withdrawals are right for you, or to start contributing to an IRA.