Qualified Distributions For IRA Accounts
Early Distributions From IRAs - Taking Withdrawals Without Penalty
Apr 2, 2009
An IRA account is something which is saved for retirement so normally withdrawals are not expected from it. However sometimes there are unforeseen circumstances which necessitates withdrawal of money from an IRA account. Distributions from an IRA before the age of 59½ are called early distributions. Normally IRS penalises early distributions by imposing a 10% penalty on the amount withdrawn.
IRS does permit an IRA account holder to make some withdrawals for which he does not have to pay the 10% additional penalty, although the amount needs to be included to his gross adjusted income. The following are the permitted withdrawals or qualified distributions from IRA.
Unreimbursed Medical Expenses
The 10% penalty can be avoided for any unreimbursed medical expenses that were paid during the year of the distribution. However only the difference between the unreimbursed medical expenses and 7.5% of the adjusted gross income (AGI) of the IRA account holder is eligible for this exception.
Medical Insurance for Unemployed
For the unemployed, the 10% penalty may be waived for the amount that they paid for medical insurance for themselves, their spouses, and dependents. However to be eligible for this, the following conditions should be satisfied.
a) The person lost his job.
b) He received unemployment compensation paid under any federal or state law for 12 consecutive weeks.
c) He received the distributions during either the year he received the unemployment compensation or the following year.
d) He received the distributions no later than 60 days after he has been reemployed.
Disability
If a person is disabled before he reaches the age 591/2 and if a physician determines that the disability is expected to result in death or to be of long, continued, and indefinite duration and that he cannot do any substantial gainful activity because of his physical or mental condition, then he does not have to pay the 10% additional tax for withdrawals.
Higher Education Expenses
Distributions without penalty are allowed to pay for qualified expenses for higher education for the account holder, his spouse or children or grandchildren. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. An eligible educational institution is any college, university, vocational school, or other post-secondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education.
For more information about taking qualified distributions for higher education, read the article 'Taking Early Distributions For Higher Education'.
Inherited IRA
If a person dies before he reaches the age of 591/2, the assets in his/her IRA can be distributed to his/her beneficiary or estate without the 10% penalty. However if the is the spouse of the deceased decides to treat the IRA as his/her own, this exception does not apply.
Purchasing a First-time Home
A total of $10000 can be withdrawn (over life time) without penalty to build, rebuild or buy a new home. This distribution must be used to pay for acquisition costs of a house which may be in the IRA holder's name, his spouse's name, his or his spouse's child, grandchild or parent or other ancestor.
A first time home buyer is someone who has not owned a house for the previous two years. Qualified distributions for first-time home buyers are explained in more detail in the article 'IRAs to the Rescue for First-time Home Buyers'.
Substantially Equal Periodic Payments
A person can receive equal amounts of distributions from his IRA over his lifespan, even if his age is less than 591/2, without paying the penalty. He must use one of the three IRS-approved distribution methods and must take at least one distribution annually to be eligible for this exception.
Please visit Publication 590 by IRS to get more information about Qualified Distributions from IRA accounts.
For traditional IRA accounts although the 10% penalty can be avoided for qualified distributions, the distributed amount needs to be included to the Gross Adjusted Income for the purpose of calculating income tax. There is an exception for Roth IRA though. Any qualified distribution made after five tax-years from a Roth IRA is not included in gross income for individual tax purposes.
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