What All Taxpayers Should Know About Early IRA Withdrawals

By: Roni Deutch | Posted: 09th September 2010

Although the purpose of an IRA is to save for the future, it is not uncommon for taxpayers to ‘borrow' money from their account. Unfortunately, there are severe tax penalties that are assessed when you make an early withdrawal. Here are some tax implications of IRA withdrawals:

Any withdrawal from your IRA before the age of 59 1/2; is considered an early withdrawal, and will result in tax penalties. However, once you turn 59 1/2;, you may take as many withdrawals as you like penalty-free until the age of 70 1/2. Once you turn 70 1/2, you will be subject to penalties once again.

Taxes and Penalties

Unless you qualify for a special exemption, every early withdrawal will be subject to a 10% tax penalty. In addition to the flat penalty, you will also have to pay income taxes on the money you take out.

Qualified Distributions

Fortunately, there are tax laws in place that allow taxpayers who have IRAs to take penalty-free withdrawals in certain situations. These instances are known as qualified distributions, and are made to assist those in special financial situations. If you have a Roth IRA which has been open at least five years, distributions can be taken both penalty, and tax-free.

Listed below are the different options for taking a qualified distribution. However, before taking an early withdrawal you should always review you account with a qualified tax professional.

Medical Expenses

Most withdrawals made for medical expenses are subject to all penalties and fines, however there is an exception. If you pay medical expenses that exceed 7.5% of you adjusted gross income, your IRA withdrawals may be penalty free.

College Expenses

Higher education is a huge expense for any student. Fortunately, an early withdrawal from your IRA to help with higher education expenses may not be taxed.

Unemployment Health Care

Taxpayers who have been receiving unemployment payments for 12 weeks or more, and need money to cover health insurance premiums, may qualify for a special exemption as well.

Active Military Exemption

If you are a military reservist who is called to active duty for 180 days or more, early withdrawals can be made without having to pay any IRS penalties.

Disability Assistance

Account holders who are mentally or physically disabled, and cannot attend to their normal job or business, can also take qualified distributions. However, the disability must be long term, and other IRS restrictions apply.

Estate Beneficiary

Withdrawals, made by an account holder's beneficiary after their death, are exempt from the penalty tax.

First Home

If you are a first-time homebuyer, up to $10,000 can be withdrawn from your IRA penalty-free. Keep in mind that a first-time homebuyer as defined by the IRS is a homebuyer who has not owned a home in the past 3 years.

IRS Exemption

If the IRS needs to withdrawal money from your IRA in order to pay a tax levy, you will not be subject to the 10% penalty.

The Tax Lady Roni Deutch and her law firm Roni Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight IRS tax liens on your behalf.
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Tags: tax implications, health insurance, financial situations, medical expenses, gross income, higher education, income taxes, iras, college expenses, taxpayers, tax penalties, roth ira, education expenses, least five years, health insurance premiums, distributions