In these tough economic times, people sometimes look at investments in their IRA accounts thinking: I wish there was a way to take some or all of the money out from my retirement savings. They don’t do that before they reach the age of 59 1/2, because they know there will subject to an early withdrawal penalty.

They are right. In most cases, all or part of the withdrawal will have to be reported as taxable income. Depending on your income, it might get you over to a higher tax bracket, and you’ll have to pay more in taxes. But on top of that, you will be asked to pay a penalty of 10 percent for early withdrawal.

However, there are a few cases when you can withdraw money from your IRA account before you reach the age of retirement without having to pay the 10 percent penalty. Here are some examples:

Medical Expenses – If you have been paying medical expenses that exceed 7.5 percent of your adjusted gross income, you can withdraw money from your IRA without paying penalty, up to the amount of the excess.

Higher Education – You can withdraw from your IRA to pay for qualified higher education for you, your spouse or your children.

You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other post-secondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited. The retirement money can be used to pay tuition and fees and buy books, supplies and other required equipment.

Health Insurance Premiums while Unemployed – Limited to those who have received unemployment compensation for 12 consecutive weeks under State or Federal law, during the current or preceding year. Premiums can be used to cover yourself, your spouse or dependents.

Disability – Account owners, who are mentally or physically disabled so that they cannot work in their regular or similar profession, can withdraw from the IRA without penalty. The disability has to be for long or indefinite duration.

First Time Home Buyers – The home must be the principal residence, purchased by you, your spouse, child or grandparents. The buyer must not have owned a home in the 2 year period ending with the new home purchase. Its limited to a $10,000 cap and the money has to be withdrawn within 120 days of the purchase on qualified expenses. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs. If you and your spouse are first time homebuyers, you can each receive distributions of up to $10,000 each without having to pay the additional 10 percent tax.

Military Reservists – Those who are called to active duty for 180 days or more can withdraw money from their IRA without penalty.

Inheritance – Money paid to the trust or beneficiaries of a deceased IRA account owner after his death are exempt from penalty.

It’s important to remember that these exceptions are for the ten percent penalty only. You still have to pay taxes on any withdrawal you take out. It is also important to note that some of the penalty tax exemptions for IRA are not available for early withdrawal from 401(k). Additional consideration should be given to Roth IRA.

Author Bio: Roy Fisher, CPA specializes in providing accounting and tax services to small business owners and professional practices in Houston, TX. For more information, go here: http://www.ledger-solutions.com

Category: Finances
Keywords: accounting advice, tax advice, CPA services