Most people know that IRAs are used for retirement. But what is considered “retirement” and what happens if you use the money before then? The rules are a little different for Traditional IRAs and Roth IRAs so today I will only cover Traditional IRAs for the sake of brevity.
“Retirement” for IRA purposes is age 59.5. Once you reach age 59.5, you can start taking money out of your IRA without penalty. But don’t forget, you’ll still have to pay taxes on whatever amount you take out because Traditional IRAs are typically funded with pre-tax money (income you have not paid taxes on yet). If you take money out of your IRA before age 59.5, you will have to pay a 10% penalty on the amount you take out (in addition to paying taxes).
Luckily, there are a few exceptions to this rule. If you are not age 59.5 but use your Traditional IRA for things like:
- unreimbursed medical expenses that are more than 10% of your adjusted gross income,
- medical insurance when you’re unemployed,
- when you are totally and permanently disabled,
- qualified higher education expenses (i.e. grad school),
- to buy, build, or rebuild a first home,
you will not have to pay the 10% penalty. This is great news for those of us who are worried about not being able to use our IRAs anytime before we retire, which if you’re a millennial, probably won’t be for a long time.