Exceptions to the 10% Early IRA Distribution Penalty

Exceptions to the IRA penalty fall into 2 categories

Just for IRAsIRA distribution penalty

First-Time Home Purchase

The 10% early IRA distribution penalty does not apply if you use the distribution to acquire a first home. Acquire means purchasing an existing home or constructing a new one for a primary residence. Closing costs also qualify. The definition of first-time home buyer is someone who has not owned a home for the past two years.

Higher Education

The 10% IRA distribution penalty does not apply if you take an IRA distribution and use it for qualified higher education expenses. Such expenses include post-secondary tuition, fees, books, supplies and required equipment. Computers, computer equipment and internet access are qualified education expenses if used by the students during the years which they are in school.

Health Insurance For Unemployed

The 10% penalty does not apply if you take an IRA distribution and use it to pay for health insurance when unemployed. The health insurance can be for the IRA owner, a spouse, or dependents.

For IRAs and Company Plans

Death

The 10% penalty does not apply if you take an IRA distribution from an inherited IRA after the death of the IRA owner. The age of the IRA owner and IRA beneficiary at the time of death does not matter.

Disability

The 10% IRA distribution penalty does not apply if you take an IRA distribution as a disabled individual who meets the strict “disability standard.” You must be unable to engage in any gainful activity because of a physical or mental condition. The condition must be expected to last a long or indefinite period of time or be expected to result in death.

72(t) Payments

The 10% penalty does not apply if you set up a series of payments from an IRA, sometimes called 72(t) or substantially equal periodic payments. To qualify, the payments must be calculated in a very specific way and must be taken at least annually.

Reservist Distributions

The 10% penalty does not apply if you are a military reservist who is called to active duty after September 11, 2001 for more than 179 days or for an indefinite period of time.

Deductible Medical Expenses

The 10% penalty does not apply if you use an IRA distribution for medical expenses that do not exceed your deductible medical expenses for the year. Medical expenses and the IRA distributions must occur during the same year. Generally, medical expenses must exceed 10% of your adjusted gross income.

This only highlights the details involved with each exception.
Contact your financial advisor for a more complete discussion.

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