You can start taking qualified distributions from your traditional individual retirement account when you turn 59 1/2 year old. At that point, you don't have to worry about early withdrawal penalties or penalty exceptions ever again. If you have to take an early withdrawal from your IRA, you usually owe a 10 percent penalty on top of the income taxes on the distribution, unless an exception, like high medical expenses, applies.
Medical Expenses Exception
The Internal Revenue Service includes an exception to the IRA early withdrawal penalty for significant medical expenses. For the 2013 tax year, the exception applies only to the amount of qualified medical expenses that exceed 10 percent of your adjusted gross income. In prior years, the threshold had been 7.5 percent. Your adjusted gross income equals your total taxable income minus any adjustments to income you claim, such as traditional IRA contributions and student loan interest.
Qualifying Medical Expenses
Qualifying medical expenses include just about all medical, dental and vision care provided to diagnose, treat or prevent disease -- things like annual checkups, prescription drugs and most surgery all count. But, there are limits: You can't include purely elective procedures, like wrinkle removal or most plastic surgery, or things you do for general wellness, like a trip to the tropics, even though you feel much better as a result. These also include costs you paid for your spouse and your dependents, as long as the costs were either paid or incurred while the person was your spouse or dependent. For example, say your child is your dependent in 2014, but not 2015. If he has surgery in 2014, you can count it even if you pay the bill in 2014 because he was your dependent when the cost was incurred.
Timing of Expenses
To qualify for the exception, the medical expenses must be paid during the same calendar year that you took the early IRA withdrawal, regardless of when the medical services are actually performed. For example, say you take an early IRA withdrawal during 2014. If you're scheduled to have surgery in January 2015, you can include those costs when figuring your medical expenses exception if you pay them before the end of 2014. Alternatively, if you have the surgery in 2014, but don't pay the bill until January 2015, you can't include those costs.
Just because the amount of the exemption is based on the amount of medical expenses you could claim as an itemized deduction doesn't mean you must itemize to take advantage of it. For example, say your deductible medical expenses are $2,000 and, when combined with your other itemized deductions, it doesn't make sense for you to give up your standard deduction. You can still exempt up to $2,000 of early IRA distributions from the early withdrawal penalty.
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