Avoiding the 10% Penalty
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If possible, it’s best for an IRA owner to leave traditional IRA funds intact until reaching age 59½ because of the federal tax law’s 10% penalty on early withdrawals. When it applies, the penalty has to be paid in addition to the income taxes owed on amounts distributed from the account that were previously tax deferred.
Sometimes, however, IRA owners need or want to take money from their accounts prematurely. When that happens, the penalty won’t apply if one of the tax law’s conditions for a penalty exception can be met.
Penalty-free withdrawals are allowed:
- For the payment of qualified medical expenses in excess of 7.5% of adjusted gross income
- For the payment of medical insurance premiums if the IRA owner has received unemployment compensation for at least 12 weeks (or the owner could have received unemployment if he or she were not self-employed)
- On account of disability
- For the payment of tuition and other eligible higher education expenses for the IRA owner or the owner’s spouse, child, or grandchild
- To buy a “first” home ($10,000 lifetime cap) for the IRA owner or the owner’s spouse, child, or grandchild (for purposes of the penalty exception, a home is considered a first home if two years have elapsed since the buyer — and the buyer’s spouse — last owned a principal residence)
- On account of an IRS tax levy on the IRA
- If they are part of a series of substantially equal periodic (at least annual) payments based on life expectancy
- If they are made to a beneficiary or estate on or after the IRA owner’s death