Penalty-Free IRA Withdrawal Rules

In most cases it’s not a good idea to prematurely withdraw money from your IRA before your retirement age. In addition to owing tax that might be due on the money to the Internal Revenue Service, you’ll face a 10 percent penalty charge on the amount. However there may be a few cases when you need to tap your IRA funds and the IRS offers penalty-free early withdrawal options.

Under little-known IRS Provision Code 72(T) you may take penalty-free IRA distributions for:

• Higher Education Expenses
  These withdrawals can be used for yourself, your spouse or your children / grandchildren. You must make sure the eligible student attends an institution. Funds can be used for any IRS-approved (meets federal student aid program requirements) public, private or nonprofit college, university, vocational school or other post-secondary facility.

• Medical Costs or Disability
  Medical expenses must be great than 7.5% of the IRA holder’s adjusted gross income. Hopefully you won’t ever have to use this option.

• Conversion to a Roth IRA

• The Purchase of a First Home.
  Withdrawal is limited to $10,000. However, if you are married, and both you and your spouse are first-time home buyers (or didn’t own a principal residence at any time during the previous 2 years) you each can pull from retirement accounts, providing you $20,000. Your IRA funds for a down payment can be used by you, your spouse, one of your children, a grandchild or a parent. Pretty cool huh! It’s important that you use the IRA funds within 120 days of withdrawal to pay for qualified acquisition costs which include the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

• Equal, periodic payments for income.
  There are a lot of restrictions for this option including equal and substantial payments for five years or until age 59 1/2, whichever is longer. The distribution is also based on your life-expectancy. More about using IRS Provision Code 72(t) for early income withdrawals.

Please talk with your tax advisor or CPA for additional details and distribution rules.