Why Pay Penalties on Your Early IRA Withdrawals?

Most Americans never need to tap their IRA funds prior to age 59 1/2 but some hardships force early IRA withdrawals. IRS imposes a 10% IRA penalty of such distributions in order to dissuade use of supposed retirement funds for other purposes.

However, unpredicted situations can force a person to require early IRA withdrawals when they have no other funds available. There are any number of calamities – such as the need to bear the expenses of an accident for which there is no medical insurance, or an unanticipated period of joblessness – that a person can face in his life and which necessitates the need to take early IRA withdrawals.

Realizing that sometimes early IRA withdrawals are unavoidable, IRS has developed a list of situations where it does not impose the penalty. Although there are some dissimilarities between exemptions for conventional IRAs, Roth IRAs and qualified plans, the IRS has come up with some exemptions to help financially challenged people to avoid the 10% penalty for early IRA withdrawal.

Here are some of the allowances for each type of retirement plan:

Traditional IRA - early IRA withdrawal penalty exemptions

Death--beneficiaries may received funds penalty-free regardless of their age
Suffering from an extensive and lifelong physical or mental incapacity
72(t) distribution (a series of substantially equal periodic payments)
To pay off an IRS levy on a qualified plan
Out of pocket medical expenses which exceed 7.5% of AGI
Qualified higher education expenses
Purchasing or constructing a home up to $10,000 if a home has not been owned in the previous 2 years
Payment of health insurance premiums for the jobless

Roth IRA - early IRA withdrawal penalty exemptions

The same exceptions as for the Traditional IRA (home buyers can pull out $10,000 penalty free and tax-free if the money has been in the Roth IRA for at least five tax years).

Qualified Plans - early withdrawal penalty exemptions

All of the exceptions that apply to Traditional IRAs.
If you separate from your employer at the age of 55 or later
Distributions made to your ex-spouse due to a qualified domestic relations order (QDRO).
Share allotments from Employee Stock Ownership Plans (ESOPs).

In order to lend a helping hand to those who face monetary constraints, the IRS has formulated these penalty exclusions. People who are most entitled to benefit from this are those suffering from grave circumstances such as death, divorce, and disability; also individuals trying their best to excel in the field of education, or working on building or buying their home can receive help by getting early IRA withdrawals without penalty.

If you are currently strapped for funds and would like to know if you are eligible to take a penalty-free distributions from your IRA or qualified plan, as an experienced accountant before making your early IRA withdrawal.