Question: If I take money out of my IRA before I’m 59½, what happens?
Answer: What you’re referring to is a premature IRA distribution. If you are under age 59½ and withdraw funds from your IRA, you’ll probably have to pay a 10 percent penalty tax on top of whatever income taxes you owe on the distribution.
This can be a major drawback for IRA owners who need money and have few other assets to draw on. However, there are a number of exceptions to this rule. You may qualify under one of these exceptions to make penalty-free IRA withdrawals, yet still subject to ordinary income tax.
- Premature IRA withdrawals made by a disabled person may be exempt from the penalty.
- If an IRA owner dies before reaching age 59½, distributions paid to you as a beneficiary are not subject to the penalty.
- If you need supplementary income, you can take IRA distributions as a series of “substantially equal payments” over your life expectancy or the joint life expectancy of you and your beneficiary. These distributions will avoid the penalty as long as you don’t modify the payments within certain time frames.
Subject to limits and conditions, the penalty generally will not apply to IRA distributions taken to pay:
- qualifying medical expenses,
- health insurance premiums while you’re unemployed,
- higher education costs,
- first-time home-buyer expenses,
- and qualified reservist distributions.
The penalty and ordinary tax does not apply to amounts rolled over from one IRA to another, assuming you follow the rules for rollovers.
Other exceptions may also apply and Roth IRAs are subject to special rules of their own.
There are many details associates with these rules, so don’t automatically assume you qualify for one of these exceptions. Do your homework and talk with your tax professional before taking any action.
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