Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies. (source: www.irs.gov) This tax is sometimes paid unknowingly by individuals because they don’t realize the options available to potentially get around this 10% penalty. While these aren’t end all be all solutions, here are five ideas that may just save you 10% should you have to tap into your IRA accounts.
- Qualified Education Expenses- For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Be sure to check into the details of the rules, but parents overlook this strategy often when it comes to paying tuition bills.
- Substantial Equal Periodic Payments (Regulation 72t)- There are several methodologies to figure out what your agreed upon annual payment from your IRA will be each and every year, but the basic premise is that you take out a ‘required’ distribution for a minimum of five years and you can escape paying the 10% tax on those distributions. This can be a creative strategy for those retiring at 50 or 55 and needing income from their IRA’s.
- Buying A First Home- For what the IRS determines as ‘qualified home buyer’, you can take up to $10,000 out of your IRA without paying the 10% penalty on the IRA distribution. It’s important to pay attention to the details of the rules around this one, but something to consider for younger individuals or families looking to purchase their first home.
- Death or Disability- If someone in your family becomes permanently disabled, this can create a shock effect on your overall financial picture. The IRA may be the last place that you want to draw funds from should this happen to you, but there are options to get money out of your IRA penalty free should disability or death happen in your family.
- 60 Day Rule- It is best to do a direct transfer from one IRA to another if you are moving financial institutions. However, if you need money from your IRA and you are certain that you can replace it quickly, the IRA allows you to take money out of your IRA and pay no 10% penalty as long as you can essentially replace an exact replica of the money within 60 calendar days.
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.