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Congress authorized individual retirement arrangements to encourage people to save for their later years. The encouragement takes the form of tax benefits for money you contribute and penalties for early withdrawal. You may qualify for a waiver of the 10 percent early withdrawal penalty for nine specific reasons, one of which involves the loss of a job.
You normally can deduct the money you contribute to a traditional IRA. The maximum you can contribute in 2013 is the lesser of your income or $5,500 -- $6,500 if you are 50 or older. You cannot deduct contributions to a Roth IRA. The Internal Revenue Service limits Roth contributions when your income exceeds an annual amount, which changes from year to year. All the money you earn inside your IRA is tax-free while it remains in the account. The IRS taxes money you remove from a traditional IRA at your marginal tax rate. Qualified distributions from a Roth IRA are tax-free, but you must observe the rules.
The IRS normally imposes a 10 percent penalty on money you withdraw from a traditional IRA before age 59 1/2. You’ll face a penalty on withdrawals of earnings from a Roth IRA if you are younger than 59 1/2 or if you remove the money before the fifth anniversary of the account. You can withdraw Roth contributions at any time without tax or penalty, although you then lose the tax-free growth of that money. The nine exceptions to the early withdrawal tax apply to both types of IRA.
You do not get a waiver for simply being unemployed, but you can receive an exception from an early withdrawal penalty if you use the early distributions to pay medical insurance premiums for you, your spouse or your dependents. To qualify, you must have lost your job and you must have received unemployment compensation for at least 12 weeks because of the job loss. The distribution must be taken during the year you received unemployment compensation or the year after. You must receive the distribution no later than 60 days after you go back to work.
Your IRA custodian will send you IRS Form 1099-R shortly after the end of the year. The form provides detailed information of your IRA withdrawals for the previous year. If you qualify for an exception to the early withdrawal penalty, Form 1099-R should contain a distribution code of 2. If the form mistakenly contains a different code, you can correct the problem by filing IRS Form 5329 and indicating the reason you qualify for the penalty exception.
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