![]() ![]() If the original account owner passed away after January 1, 2020, a beneficiary is required to withdraw all assets from the inherited IRA within ten years of the IRA owner’s death. If the heir is a non-spousal designated beneficiary of a deceased person’s IRA, withdrawals from the inherited IRA are not subjected to early withdrawal penalties. Check with the school to make sure it satisfies the requirements to be part of the program. Qualifying institutions include colleges, universities, and vocational schools eligible to participate in federal student aid programs. Room and board also count if the individual attending college is at least a half-time student. Eligible expenses include tuition, fees, books, supplies, and equipment. Penalty-free withdrawals are permitted to pay eligible higher education expenses for you, your spouse, or the children or grandchildren of you or your spouse. Here’s the good news: there are 12 exemptions to the early withdrawal penalty.Įxemption 1 - Qualified higher education expenses Unfortunately, if the withdrawal is subject to the 10% penalty, a tax penalty cannot be offset by deductions-a fact that catches many taxpayers by surprise. The distribution could be sheltered by the individual’s deductions, resulting in no tax due. The most common exception is when the funds withdrawn are considered after-tax contributions.Įven when the withdrawal is considered taxable, the taxpayer may not owe any tax on the distribution, depending on their tax situation. ![]() There are exceptions to the 10% penalty, but generally, money withdrawn from a retirement account, regardless of the reason, is subject to income tax. When taxpayers younger than 59 ½ withdraw funds from a traditional IRA, Simplified Employee Pension (SEP) IRA, Savings Incentive Match Plan for Employees (SIMPLE) IRA, or Roth IRA, the withdrawal is usually considered a premature distribution and is subject to ordinary income tax and a 10% penalty. When it comes to IRA withdrawals, people often confuse tax-free and penalty-free. ![]()
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