Traditional IRA Distributions – Exceptions to the Rules

In exchange for the tax advantages offered by Traditional IRA accounts, the IRS enforces rules regarding Traditional IRA distributions. If a Traditional IRA holder takes a distribution before reaching age 59 1/2, they may face a 10% penalty on top of the applicable taxes. However, the IRS offers a few exceptions to this rule.

Questions about distributions? Submit your questions through the messaging feature of the Client Portal.

Exceptions To The Rules

• Unemployed individuals that have received Federal or State unemployment compensation for 12 consecutive weeks may be eligible. Specifically, early distributions could pay for qualified medical insurance premiums. The premiums must be for you, your spouse, or your dependents. They also cannot exceed the amount of the premium that’s being covered. One must also receive the distribution in the year he or she received unemployment compensation, or in the year following. In determining the deductibility of premiums, you would ignore the adjusted gross income (AGI) floor for claiming medical expenses as an itemized deduction in reporting the distribution.

• If you have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse were born before January 2, 1950) of your adjusted gross income.

• The 10% penalty does not apply if the account holder is totally and permanently disabled.

• If you are the beneficiary of a deceased IRA owner, there are special rules that apply to Inherited IRA distributions.

• The 10% penalty does not apply if you are receiving distributions in the form of an annuity.

• If early distributions are for qualified higher education expenses and do not exceed the amount specifically used for these expenses. Qualified educational expenses include tuition, fees, books, supplies, and other qualified equipment.

• First-time homebuyers can use an early Traditional IRA distribution to buy, build, or rebuild a first home (up to $10,000).

• Distributions that are due to an IRS levy of the qualified plan do not face the 10% penalty.

• Qualified reservist distributions are also exempt from penalties.

• Distributions that are made as rollovers into another IRA or qualified plan (and follow the timeline for IRA rollovers) do not incur a penalty.

Reach Out With Your Questions

The exceptions for taking early Traditional IRA distributions can potentially provide account holders with additional benefits on top of the tax advantages inherent to the account. Before taking an early distribution from your Traditional IRA, be sure to reach out to a trusted tax professional in order to share your specific situation to ensure it falls within the IRS guidelines. Please feel free to contact New Direction Trust Company at 877-742-1270 or send us a message through the Client Portal.