When times are tough as they have been the past few years for many, we often examine our financial position and may seek to liquidate investments to help get through the difficult period. At this time, many people look to their IRA accounts and see a great big pile of cash-their cash-sitting untouched while they’re struggling to put food on the table.

The temptation to withdraw funds from your IRA account can be a big one, but there are penalties. In most cases, all or part of the withdrawal will need to be declared on your tax return as taxable income, which means you may end up paying more taxes. In addition to this, there is also a 10 percent penalty imposed for early withdrawal.

There is some good news though. Following is a list of the most common situations where you may be entitled to withdraw some or all of your retirement savings prior to reaching retirement age without being slugged with the 10 percent penalty (note: normal taxes may still apply):

Medical Expenses – These can add up very fast! If your medical expenses are in excess of 7.5 percent of your adjusted gross income, you may withdraw funds from your IRA account (up to the amount of the excess) without being penalized.

Health Insurance Premiums for the Unemployed – So long as you’ve been receiving unemployment compensation for twelve consecutive weeks (during the present or preceding year) under State or Federal law, you can withdraw funds from your IRA account specifically to pay the health insurance premiums for you, your spouse, and/or your dependents.

Disability/impairment – If you become disabled and are mentally or physically unable to perform your regular duties in your usual or similar profession, you may receive access to your IRA account without penalty. The proviso on this scenario is that the “disability” must be long-term or for an indefinite duration. In other words, a relatively minor injury such as a broken arm would not qualify.

Higher Education – You may withdraw money from your IRA account to fund qualified higher education for you, your spouse, or your children.

To be eligible for the exemption, the student must be attending an IRS-approved institution (i.e., one that meets federal student aid program requirements.) Whether the institution is public, private, or non-profit does not affect eligibility.

Under this exemption, the money withdrawn from the IRA account must be used for tuition fees, purchasing books and other required educational equipment and supplies.

First Time Home Buyers – Buying/building your own home is an exciting time, but not without financial stresses. Under this exemption you may be permitted to withdraw up to $10,000 from your IRA account to assist with the purchase of your new home. If you and your spouse are both first time homebuyers, you can both take advantage of this concession and withdraw $10,000 each.

To be free from the 10 percent penalty, the home must be the principal residence and purchased by you, your spouse, your child/ren, or grandparent/s. If you have owned a home in the 2 years prior to this home purchase, you’re not eligible for this exemption.

The amount up to $10,000 must be withdrawn within 120 days of the purchase and must be for qualified expenses which include not only the buying/building/rebuilding costs, but also settlement, financing and closing costs.

Military Reservists – If you’re called to active duty for at least 180 days, you may be entitled to withdraw money from your IRA account without the 10 percent penalty.

Inheritance – The person/s (or trust) who ultimately receives funds paid out from an IRA account of the deceased is not required to pay the 10 percent penalty.

As with all exemptions and concessions, there are strict requirements and procedures to follow to assure your eligibility. Further, some of the above exemptions do not apply to 401(k) accounts or Roth IRA accounts. To avoid inadvertently becoming ineligible for this concession, ensure you discuss your personal situation with your tax advisor prior to taking action.

Amit Chandel, CPA specializes in providing accounting, tax services and tax resolution services to small business owners in Irvine, CA. For more information, go here: http://www.focuscpa.com

Amit Chandel, CPA specializes in providing accounting, tax services and tax resolution services to small business owners in Irvine, CA. For more information, go here: http://www.focuscpa.com

Author Bio: Amit Chandel, CPA specializes in providing accounting, tax services and tax resolution services to small business owners in Irvine, CA. For more information, go here: http://www.focuscpa.com

Category: Advice
Keywords: CPA advice, accounting and tax advice, CPA business services