Bush > IRA Withdrawals that Escape the 10% Tax Penalty

| May 27, 2015

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Stacy Bush, Valdosta Today Financial Contributor:

The reason withdrawals from an Individual Retirement Account (IRA) prior to age 59½ are generally subject to a 10% tax penalty is that policymakers wanted to create a disincentive to use these savings for anything other than retirement.¹

Yet, policymakers also recognize that life can present more pressing circumstances that require access to these savings. In appreciation of this, the list of withdrawals that may be taken from an IRA without incurring a 10% early withdrawal penalty has grown over the years.

Penalty-Free Withdrawals

Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, generally is due on such distributions.

Death — If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into his or her IRA, he or she will forfeit this exception.²

Disability — Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.³

Substantially Equal Periodic Payments — You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should seek consider speaking with a qualified tax professional.⁴

Home Purchase — Up to $10,000 toward the purchase of your first home (defined by the Internal Revenue Service (IRS) as not having owned a home in the last two years).
This is a lifetime limit.

Un-reimbursed Medical Expenses — This exception covers medical expenses in excess of 7.5% of your adjusted gross income.

Medical Insurance — Permits the unemployed to pay for medical insurance if they meet specific criteria.

Higher Education Expenses — Higher education expenses for you, your spouse, children or grandchildren. Only certain institutions and associated expenses are permitted.

IRS Levy — To pay an IRS levy.

Active Duty Call-Up — Reservists called up after 9/11/01 and whose withdrawals meet the definition of qualified reservist distribution.

With an IRA, once you reach age 70½, generally you are obligated to begin taking required minimum distributions.

Your required minimum distribution (RMD) may be based on your age or the deceased’s age at the time of death. Penalties may occur for missed RMDs. Most are required to begin by December 31 of the year following the date of death. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. You will pay taxes on any distributions you take. Consider speaking with a financial professional who can help you evaluate the potential impact an inheritance might have on your overall tax situations.

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which may have an impact on after-tax investment returns. Please consult legal or tax professionals for specific information regarding your individual situation.


Stacy Bush has practiced independent financial advising in the Valdosta area for 14 years. Growing up on a farm in Donalsonville, Georgia, he is keen to the financial needs of South Georgia and North Florida families. Stacy and his wife, Carla, live in Valdosta with their four children. You can submit questions about this article to askstacybush@lpl.com

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