Premature Withdrawals
There are a number of rules limiting the withdrawal and use
of your IRA assets. Violation of the rules generally results in taxation
of the withdrawn amount as ordinary income plus a penalty equal
to 10 percent of the withdrawal. The rules apply equally to SEP-IRAs
and IRAs established under SIMPLE plans, except that the penalty for
a withdrawal from a SIMPLE plan within the first two years of participation
is 25 percent. Also, there are more lenient rules for Roth IRAs.
Generally, you violate
the rules if you withdraw assets from your regular IRA before you
reach the age of 59-1/2. However, there are a number of exceptions
to these rules for cases that might be considered hardship withdrawals.
If you can use any of these exceptions, you won't have to pay the
penalty, but you will still be taxed at ordinary rates on the amount
of the withdrawal. Also, you must complete IRS Form 5329, Additional
Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,
and give the reason that the distribution is escaping from the penalty.
Exceptions. There
are several exceptions to the age 59-1/2 rule that can save you from
having to pay the penalty. (You will still owe the income tax.) You
can avoid the penalty in the following circumstances:
- You have unreimbursed medical expenses that are more than
10 percent (7.5 percent if you, or your spouse, are age 65 or over)
of your adjusted gross income.
- The distributions are not more than the cost of your medical insurance
for you, your spouse and your dependents and all the following apply:
(1) you lost your job; (2) you received unemployment compensation
for at least 12 weeks; (3) you received the distributions in the year
you received unemployment compensation or in the following year and
you received the distributions no later than 60 days after you are
re-employed.
- You are disabled and can provide a physician's statement as proof
that you are unable to be gainfully employed and that the condition
is likely to be either long-lasting or end in death.
- You are the beneficiary of a deceased IRA owner.
- You are receiving distributions in the form of an annuity - which
means you are receiving substantially equally payments at least once
a year for the remainder of your life (or life expectancy).
- The distributions do not exceed the amount of your qualified higher
education expenses (such as tuition, books, room and board (for full-time
students) at a post-secondary school for you, your spouse, your children
and grandchildren (or those of your spouse).
- You use the distributions to buy, build, or rebuild home for you,
your spouse, your (or your spouse's) children, grandchildren, parents
or grandparent. This must be a first home or your (and if you are
married, your spouse's) first home within the past two years. The
amount that can be distributed penalty free is limited to $10,000.
- The distribution is due to an IRS levy of the qualified plan.
- You are a "qualified reservist," which means that you are a member
of the reserves of a military branch and you were called to active
duty after September 11, 2001 for more than 179 days and the distribution
was while you were on active duty.
If none of these exceptions apply, you may still may be
able to avoid the penalty. If you make a contribution to an IRA (perhaps
mistakenly), you take no deduction for it, and you withdraw your contribution
and pay interest before the due date (including extensions) of your
income tax return for that year, the withdrawal is not a taxable distribution.
However, any interest or income on the amounts are treated as taxable
income in the year the contribution was made. The income must be
reported on Form 5329.
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