Learning the rules of IRA withdrawals is important. While IRAs are designed to be withdrawn from after the age of 59 1/2, there is an exception for cases of severe hardship. Here are the basics of hardship withdrawals and how they work.
Withdrawals from your IRA are meant to take place at retirement. At that point, there is no penalty for taking the money out. If you take it out before you reach the age of 59 1/2, you will typically have to pay a 10 percent penalty. However, for most IRA accounts, there is an exception that allows you to take money out in certain extenuating circumstances. This is referred to as a hardship withdrawal, and it may allow you to take out the money that you need without paying a 10 percent penalty on it.
When you are interested in a potential hardship withdrawal, you will want first to check whether you are eligible. Only certain things qualify as hardships, and you have to be able to prove that you are subject to one. Tell your IRA provider about your situation. They should be able to tell you if you qualify for a hardship. Some IRAs do not allow for every possible hardship. For example, your IRA might allow only for medical expenses. Therefore, if you needed money to pay for a child's college expenses, you would not be able to get your hands on the money without paying the 10 percent penalty.
If you determine that you are eligible for a hardship withdrawal, you need to find out what your provider requires to process it. Providers have their own methods for approving a hardship withdrawal. All providers, however, will expect you to detail the nature of your hardship. They may want you to simply write a letter and attach proof of the hardship. They may have a special form that you need to fill out.
Before you start the process, you will want to decide exactly how much money to withdraw. You may have a withdrawal limit that you have to stay within. Leave as much as you can in the IRA so that you will not adversely affect your retirement any more than you have to.
Even if you are eligible for a penatly-free withdrawal, that does not necessarily mean that you should make one. IRAs are set up to provide money for your retirement. Once you reach the age of retirement, you may not be able to provide for yourself anymore. When you cut into your retirement funds, it could take many years to build your account back up to the level that it once was at. Therefore, a hardship withdrawal should be only a last resort.