Early Withdrawal From a Traditional IRA

IRAs were designed to fund your retirement.

Traditional IRAs offer retirement investors unique tax benefits. The IRS allows you to deduct amounts you contribute to a traditional IRA from your taxable income each year, up to a limit. Your earnings grow tax-free while in an IRA. At age 59 1/2, you may begin withdrawing money, which is subject to applicable income taxes. If you take early traditional IRA distributions, you are subject to taxes and, possibly, an additional penalty.

General Rule

Generally, according to IRS Publication 590 on Individual Retirement Accounts, you may begin withdrawing traditional IRA funds, penalty-free, at age 59 1/2. As of the 2009 tax year, you must start taking distributions by age 70 1/2. All traditional IRA distributions are taxable at the tax rate that current as of the distribution date. If you withdraw traditional IRA funds prior to age 59 1/2, the government charges penalty of 10 percent of the amount withdrawn. Several exceptions to this rule apply.

Medical Expenses

If you have unreimbursed medical expenses that equal more than 7.5 percent of your adjusted gross income, the IRS allows you to take an early traditional IRA distribution without paying the additional 10 percent penalty. In addition, if you suffer from a physical or mental disability that prevents you from working, the IRS waives the 10 percent penalty on traditional IRA distributions prior to age 59 1/2.

Higher Education Expenses

For qualified higher education expenses, you may withdraw traditional IRA funds penalty-free prior to age 59 1/2 if the amount removed does not exceed what you paid during the tax year. Qualified expenses, according to the IRS, include tuition, fees, books, supplies and room and board, as long as the student is enrolled at least half-time. Special needs services also count as qualified higher education expenses.

First Home Buyers

If you plan to buy, build or rebuild your first home, the IRS permits penalty-free early distribution up to $10,000 from your traditional IRA. Costs can be associated with your own first home or the first home of your spouse, as well as your children, grandchildren or parents and those of your spouse. The $10,000 figure represents the maximum distribution allowed over your lifetime for first-time homebuyer expenses.

Annuities

Consult your tax adviser for details on annuitizing your traditional IRA. In essence, the IRS allows you to receive traditional IRA distributions via a series of fixed payments over the course of your life or life expectancy. As long as you use IRS-approved methods, these distributions do not trigger the 10-percent early withdrawal penalty.

Qualified Reservist Distribution

You may be able to claim a penalty-free qualified reservist distribution from the IRS. If you were called to active duty after Sept. 11, 2001; if that duty lasted for more than 179 days; and if the early traditional IRA distribution was not made before or after the active duty call-up, you may receive the funds prior to age 59 1/2 without having to pay the 10 percent penalty.

Example

The IRS provides an example in Publication 590 to illustrate the math on an early traditional IRA distribution. If you withdraw $3,000 from your traditional IRA account and you do not meet the requirements of a qualified distribution, including the common ones stated in this article, you must pay a $300 penalty---10 percent of $3,000---on the distribution. You must also include the $3,000 in your gross income for the year. The IRS taxes it at the current tax rate.

References

• Internal Revenue Service (IRS): Publication 590, Individual Retirement Arrangements (IRAs)