Volume 2 Issue 2007

You didn’t think you’d have a problem keeping your savings in your traditional IRA until you reached age 59½. Unfortunately, though, you need to take money out of your account now. You’ll have to pay income taxes on your early withdrawal, but what about the additional 10% penalty tax? Can it be avoided?

The federal tax law does let taxpayers off the 10% penalty hook in certain situations.

Higher education. You may withdraw money from your IRA without penalty for the payment of tuition and other eligible higher education expenses. The student can be you, your spouse, your child, or your grandchild.

Medical. Withdrawals for the payment of medical expenses in excess of 7.5% of your adjusted gross income may be penalty free (other restrictions apply), as may withdrawals for the payment of medical insurance premiums after you’ve received unemployment compensation for at least 12 weeks.

Disability. Withdrawals on account of your disability (inability to engage in any substantial gainful activity) are penalty free.

“First-time” home buyer. You may withdraw up to $10,000 (lifetime cap) for the acquisition of a first home. The buyer can be you, your spouse, your child, or your grandchild, and the term “first” is interpreted loosely — as long as two years have elapsed since the buyer (and spouse) last owned a principal residence, the new home is considered a first home.

Reservist. If you are a reservist ordered or called to active duty after September 11, 2001, and before 2008, withdrawals during the period beginning on the date of the order or call to active duty and ending at the close of your active duty period are penalty free.

IRS levy. The penalty doesn’t apply to withdrawals on account of an IRS tax levy on your IRA.

Periodic payments. Taking a series of substantially equal periodic (at least annual) payments based on life expectancy will avoid the penalty.