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 from their account before reaching 59.5 years of age, they may face a 10% penalty in addition to income tax on the amount withdrawn.
However, the IRS offers a few exceptions to this rule. Below is a breakdown of the ways in which Traditional IRA holders can potentially take early distributions without incurring the 10% penalty.
- If you are an unemployed individual that has received Federal or State unemployment compensation for 12 consecutive weeks, you may be eligible to use a Traditional IRA distribution to pay for qualified medical insurance premiums without worrying about the 10% penalty. The premiums must be for you, your spouse, or your dependents and cannot exceed the amount of the premium that’s being covered. The distribution must also be received in the year the account holder received unemployment compensation, or in the year following. To determine if the premiums are deductible, the adjusted gross income (AGI) floor for claiming medical expenses as an itemized deduction are ignored in the reporting of 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 (per Nevada Appeal).
- If the account holder is totally and permanently disabled, the 10% penalty does not apply to early distributions of a Traditional IRA account.
- 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.
- You can take early distributions from your Traditional IRA account if they 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 home buyers 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 penalty.
- Distributions that are made as rollovers into another IRA or qualified plan (and follow the timeline for IRA rollovers) do not incur a penalty.
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 call your custodian and share your specific situation to ensure it falls within IRS guidelines. Please feel free to contact New Direction Trust Company at 877-742-1270 or send us a message through your client portal at portal.ndtco.com.