Can I Have an Early Distribution From My IRA Without Penalty If I Am Disabled?

When Congress first designed the individual retirement account, or IRA, as part of the Employee Retirement Income Security Act of 1974, it wanted to ensure that workers would earmark the money for their retirement security, rather than use IRAs as tax-advantaged short- and medium-term savings accounts. At the same time, Congress didn't want to discourage people from contributing by making it too hard or too expensive to get the money out for emergencies. And so Congress carved out certain hardship exemptions from early withdrawal penalties. Disability is considered a hardship for the purposes of IRAs.

Taxation of Traditional IRA Withdrawals -- The General Case

Generally, the IRS assesses income tax on any withdrawals from traditional IRAs, with the exception of any balances attributed to non-deductible contributions. But to the extent you received a tax deduction on your contributions, you can expect to pay ordinary income tax on any withdrawals, regardless of your age. In addition, you will also be assessed a 10 percent penalty on any withdrawals you make before age 59 1/2, unless certain conditions apply.

Roth IRA Rules

Withdrawals of Roth IRA balances, on the other hand, are not usually taxable as income, provided that the money has been in the account at least five years. However, the 10 percent penalty still applies on any gains you withdraw before you are 59 1/2. However, exceptions to the penalty also apply to the Roth.

Hardship Withdrawals

The IRS will waive the 10 percent penalty on early withdrawals under the following hardship conditions: You are disabled; you are using the money to pay medical costs, including medical insurance premiums; you are using the money to make a down payment of up to $10,000 on a first home for you or a relative; you are using the money to pay higher education expenses for yourself or a relative; or you are making the withdrawal to avoid foreclosure or eviction. In these cases you will still have to pay any income taxes due, but you will not have to pay the 10 percent penalty on top of that.

IRC Section 72(t) Withdrawals

If none of the above hardship conditions applies, and you are under 59 1/2, you can also avoid the 10 percent early withdrawal penalty under Section 72(t) of the Internal Revenue Code. This law allows you to avoid the penalty if you commit to withdrawing your balance as a series of substantially equal periodic payments over the rest of your life, or the combined lifetimes of yourself and one other individual, such as your spouse. This is a popular election to take among those who want to retire very early. It you take this option, you give up the advantage of tax-deferred compounding (in traditional IRAs) or tax-free compounding (in Roth IRAs).

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