Ways to avoid IRA distribution or early withdrawal penalties


IRA stands for individual retirement account, and it is a term used to connote a type of savings account that is designed to help you save for retirement and offers many tax advantages.

IRA distribution

There are two different types of IRAs and they are: Traditional and Roth IRAs. Basically, an IRA distribution is used to describe distributions from an IRA and it is also known as a withdrawal. IRA distributions must follow a specific set of requirements in order to be “qualified” and free of taxes (when applicable) and early withdrawal penalties.

When you hear the word ‘distribution’, it is used to indicate the withdrawal of cash and/or assets from an IRA. When you have a going IRA account, withdrawing or taking an IRA distribution can be done at any time. As said, penalties may apply. Your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you’re under age 59 ½ and you withdraw. Also, the additional tax is 25% if you take a distribution from your SIMPLE-IRA in the first 2 years you participate in the SIMPLE IRA plan. Even though an early withdrawal penalty may apply if this is done before the account holder reaches age 59.5, there are certain exceptions that could be met to circumvent it.

Ways to avoid IRA distribution or early withdrawal penalties

  • Use it for medical bills and expenses: If you use the withdrawal to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income in the same year the withdrawal was made, you would circumvent the early withdrawal penalty.
  • Use the distribution for a first-time home purchase: If you are a first time home buyer, you can take a penalty-free IRA distribution to buy, build or rebuild your first home or the first home of you or your spouse’s child, grandchild or parent. The amount to be taken is up to a $10,000 lifetime limit for individuals and also $20,000 for couples.
  • Use it for military service: if you happen to be a military personnel, you can enjoy penalty – free withdrawals on your IRA distribution. The people the Army Reserve, Naval Reserve, Marine Corps Reserve and Air National Guard, who were called to active duty after Sept. 11, 2001, for a period of more than 179 days or an indefinite period. However, the IRA distribution must be taken during the active duty period to avoid the overall penalty.
  • By setting up an annuity: Another great way to avoid the penalties is to set up a series of annuity payments from your IRA. The annuity payments will be computed based on life expectancy or the joint life expectancies of you and your beneficiary. It may, thus, require professional assistance.
  • Use it for health insurance or Disabilities: An IRA distribution can also be taken without penalty to pay for health insurance for you, your spouse and your dependents following a period of unemployment. Also, If you become disabled and you cannot participate in gainful activity or secure gainful employment as a result of the physical or mental condition, you quality for an exemption to the early withdrawal penalty.

Other ways include:

  • Distribute your traditional IRA to a beneficiary or heir
  • Withdraw your IRA contribution from a Roth IRA
  • Just leave the money in a 401(k)
  • Use it for college costs and tuition
  • Your heirs received the money distributed after your death
  • Qualify for other exceptions that apply to traditional IRAs

Note that various terms and conditions may also apply. If you wait for the IRA to mature, you can then enjoy the benefits that come with it. See the minimum IRA distribution rules below.

Required minimum distributions

There are different rules for withdrawals and distributions and they depend on the type of account you have. Where you have a Traditional, Rollover, SEP, or SIMPLE IRA and are nearing age 70½, it’s essential to learn about Required Minimum Distributions (RMDs). Roth and Inherited IRAs have their own rules as well. Minimum withdrawals are based on life expectancy. Find out what your minimum required distribution is. Then, you can take the full amount from just one account or from several accounts.

When it comes to withdrawing, you must begin withdrawing money from your traditional IRA by April 1 the year after you reach age 70 ½. If you don’t withdraw the minimum amount, the IRS will assess a penalty equal to 50% of the amount you should have withdrawn. The challenges about these are apparent. Since it is based on life expectancy, you would not know for sure if you would live too long to exhaust the distributions or if you would die too early to even benefit from it at all.

Based on the following ranges, your IRA distribution plan can be coined out:

  • If you are between ages 59 and under, 10% withdrawal penalty and taxes apply. These are, of course, subject to the exceptions already stated above
  • If you are between ages 59½ to 70, no withdrawal penalty but taxes apply. Here, withdrawals are taxed as ordinary income
  • If you are between ages 70½ and over, then the annual withdrawal is required and taxes then apply.

If you have individuals dependent on you, it is advisable to try as much as possible to wait till it matures. That is, avoid IRA distribution till 70 ½. There are numerous other things to note before choosing whether to take an IRA distribution and how to circumvent it as appropriate.  Just be sure to get all the necessary information from the companies or bodies in charge before signing up. Also, seek the help of professionals and advisors before making decisions so as not to shoot yourself in the leg. Where you are an heir with an IRA plan that has been passed down to you, you also have to seek the help of professionals. With these, you would not go wrong with it.

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