IRA Early Deduction Penalties
Your individual retirement arrangement (IRA) is likely to be one of your bigger sources of savings in life. Congress has created a system of tax-preferred incentives to encourage you to save for your retirement. In addition to incentives to encourage your savings, Congress has established penalties if you use your retirement savings prior to reaching your retirement age. There are, however, exceptions to the early deduction penalties.
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Basic IRA Deduction Rules
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Federal law provides that you may take distributions from your IRA at any time after you reach age 59 ½. Additionally, even if you have not reached age 59 ½, you are allowed to withdraw any contributions you make to an IRA if you do so before the date you file your personal tax return.
Early Distribution Penalties
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If you wish to take a distribution from your IRA prior to the date you reach age 59 ½ and you are not withdrawing the contributions you made during the taxable year prior to filing the tax return for that year, you may be assessed a penalty. The penalty for early distributions is an additional 10 percent tax on the distribution. Note also that the amount of your distribution must be included in your gross income.
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Exceptions to Penalties
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Just as Congress has established a system of incentives and penalties to encourage retirement savings, Congress has established certain exceptions to the early distribution penalty. You may take an early distribution without being assessed the additional 10 percent tax if you find yourself in any of the following situations: your out-of-pocket medical expenses constitute more than 7.5 percent of your adjusted gross income, you take a distribution equal to the cost of your health insurance, you become disabled, you are the designated beneficiary of a deceased IRA owner, you are receiving distributions as an annuity, you receive distributions in an amount equal to your qualified higher education expenses, you take a distribution to buy your first home, you take a distribution as a result of an IRS levy of the qualified plan or you are eligible to receive a qualified reservist distribution.
Rollover Basics
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You may rollover your IRA before you reach age 59 ½ without being assessed the additional 10 percent tax. You must meet certain requirements to avoid this penalty. You must make the rollover within 60 days and your IRA must be rolled over into another qualified plan.
Mandatory Distributions
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Although you are penalized for taking a distribution prior to reaching age 59 ½, Congress also requires you to start your distributions by April 1 of the year following the year you reach age 70 ½. If you fail to take your distributions by this point, you may be assessed an excise tax equal to 50 percent of the amount of the required distribution.
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