IRA Funds for Education and Medical Expenses

The IRS allows for penalty-free early withdrawals (before age 59 1/2) from an IRA for higher education expenses or medical expenses, but certain rules do apply.

Withdrawals are allowed to pay for higher education costs for the IRA owner, their spouse, or dependent.  However, the funds must be used for expenses incurred for the same year of the withdrawal. The distribution is exempt from the 10% penalty, but income tax is due on the distribution amount. Early withdrawals from a 401(k) do not get the same treatment.  These funds will incur the 10% penalty.

Early withdrawals from both IRAs and 401(k)s are allowed to pay for medical expenses, without

incurring the 10% penalty. The medical expenses must be for the IRA owner, spouse, or dependent and must be used for expenses the year the withdrawal occurs. The funds can only be used for the amount of medical expenses that exceed 10% of the taxpayer’s adjusted gross income.

There are ways to plan for early withdrawals from your various retirement funds. Kakenmaster & Associates can help you determine how to best use these funds if early withdrawals are necessary.