How to Avoid IRA Withdrawal Penalties

Retirement can seem like a long way off, especially if you've built up a respectable nest egg and you'd like to tap into it. Unfortunately, a penalty of 10 percent of what you've earned (plus taxes) can be applied for withdrawing IRA funds early. Here are some ways to dodge the bullet and take advantage of your retirement before--well--before you retire.

Instructions

Difficulty: Moderate

1. Wait until you are 59 1/2. The easiest way to avoid IRA withdrawal penalties is to wait until the baseline regulations have passed. In addition, the IRA must have been opened for 4 years after the tax year in which it was initially funded.
2. Use premature IRA withdrawal for excessive medical expenses. If your medical bills are extreme, which the law defines as more than 7.5 percent of your adjusted gross income, you are eligible to take IRA money out early. Similarly, unemployed persons can use IRA money penalty-free to pay for health insurance premiums.
3. Buy a house. Withdrawal penalties are waived if you take money from your IRA to purchase a home for yourself or your children (if it's a first-time purchase for them).
4. Know that IRA funds will be withdrawn early without penalties if you die or are severely disabled. These are the two biggest exceptions to IRA penalty rules.
5. Sign up for periodic payments. Another way to avoid IRA withdrawal penalties is to agree to a "substantially equal periodic payment exception." This means you will receive payments of the same amount on a regular basis. However, proceed with caution. If you start receiving early payments and then change your plan later on, you may be subject to penalties.
6. Plan ahead. By far, the best way to avoid the penalties of an early withdrawal is to plan ahead so you won't have to do it at all. Think of your IRA as the absolute last thing you want to touch. Work longer if you are able. Do consultant work or start your own business. Create methods for earning extra cash. Leave the IRA alone.

Tips & Warnings

• Enlist a financial consultant for help before you do anything with your IRA. Hidden penalties and secret fees can put a major dent in your funds, even if you think you know what you're doing. Let the pros handle it.
• Some reach the age of 59 1/2 and are not ready to start withdrawing IRA funds. It's not mandatory to take payments immediately, but make sure you begin before age 70 1/2, or you'll pay major penalties for no withdrawals.