Early distribution rules are like the hot coals of traditional IRA ownership. Transgression can result in a great deal of pain -- taxwise, that is. Fortunately, the Internal Revenue Service created several exceptions to the early withdrawal rules for both traditional and Roth IRAs. Notable are those that support the American dreams of home ownership and access to higher education.
Traditional IRA Distribution Taxation
Every traditional IRA distribution is taxed as ordinary income. You can under certain circumstances avoid paying the extra 10 percent penalty tax for a traditional IRA early withdrawal. But you cannot escape the income tax.
Age 59 1/2 Rule
If you own a traditional IRA, you cannot take money from the account before you turn 59 1/2 without triggering a 10 percent early withdrawal penalty. There are limited exceptions to this rule.
If you use a traditional IRA withdrawal to buy or build a new home, you do not have to pay the early withdrawal penalty. You can withdraw up to $10,000 in your lifetime under the IRS rules for this exception. In addition, you can buy the house for yourself, your spouse, your children, your parents or your grandparents. Moreover, the Internal Revenue Service defines first-time homeowner in this instance to mean an individual who has not owned a home for two years. So if you owned a home for five years, then sold it and became a renter for two years, you would qualify for the exception. The IRA funds must be used within 120 days of their withdrawal.
Higher Education Expenses
You can avoid the early withdrawal penalty if you use IRA monies to pay for higher education costs, to include tuition, fees, books and supplies, among other expenses. You can pay to educate yourself, your spouse, your children or your grandchildren. There is no limit on how much you can withdraw for this purpose.
If your medical expenses exceed 7 percent of your adjusted gross income for the year, you can use traditional IRA funds to cover them and sidestep the early withdrawal penalty. In addition, should you become unemployed, the IRS allows you to pay your monthly insurance premiums with IRA money penalty-free. Your becoming totally and permanently disabled also exempts you from the penalty. You may need certification from a doctor to prove your disability.
Roth IRA Rules
You can withdraw the money you contribute to a Roth IRA without penalty or tax at any time. However, taking out earnings before you reach age 59 1/2 subjects you to a 10 percent penalty. The same penalty exceptions that apply to early withdrawals from a traditional IRA -- that is, first-home purchase, higher education costs, etc. -- apply to earnings distributed from a Roth before age 59 1/2.