Monthly Archives: April 2008

Avoiding the 10% Penalty on Early IRA Distributions

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There are times when an IRA owner has to take an early distribution. Normally, distributions taken before age 59 1/2 will be subject to a 10% penalty. For example, if you take a $10,000 distribution, an early distribution penalty of $1,000 could apply. There are exemptions from this penalty. The exempted distributions are:

  • made on or after the taxpayer’s death
  • attributable to the taxpayer becoming disabled
  • part of a series of substantially equal payments (annuity) for the life of the taxpayer or the joint lives of the taxpayer and a designed beneficiary
  • used to pay medical expenses to the extent the distribution does not exceed the employee’s deductible medical expenses
  • used to pay deductible medical insurance if the individual has received unemployment compensation under federal or state law for at least 12 consecutive weeks in the year of withdrawal or the previous year
  • used for first-time homebuyers (subject to a $10,000 lifetime cap)
  • used to fund higher education expenses
  • made on account of an IRS levy on an IRA
  • made to a qualified reservist
  • qualified distributions to victims of Hurricane Katrina, Rita, or Williams
  • made incident to divorce

If your distribution falls within one of these exemptions, your distribution will not be subject to the 10% penalty. However, the distribution will still be subject to income tax.

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