IRA Distribution

Avoid An IRA Premature Distribution Penalty

Any time you plan to withdraw money from an state pension individual retirement account (IRA) before you are 59 1/2 years old, the withdrawal is subject to a distribution penalty. This includes other plans such as a tax-deferred annuity that is paid to a beneficiary who is also under 59 1/2. You will be hit with a 10 percent early withdrawal penalty, or an IRA premature distribution penalty.

The only way to avoid the penalty is to wait until you have reached the required age limit, if at all possible. Like most rules, there are a few exceptions. Careful financial and tax planning will help you avoid penalty issues.

First, you must understand that there are a number of rules that limit the withdrawal and use of IRA assets. Violating these rules leads to a taxation of the amount you have withdrawn, plus the 10 percent penalty. The rules are the same whether you have a SEP-IRA or traditional IRA that was established under SIMPLE plans.

The exception to this rule is when the withdrawal occurs within the first two years of participation in a SIMPLE plan, you have to pay a 25 per cent penalty. This is an IRA premature distribution penalty that you want to avoid. The rules for the Roth IRA are more lenient.

There are a few situations identified as hardship withdrawals that can help you avoid an IRS premature distribution penalty. Though you will not have to pay a penalty, you will still be taxed at ordinary rates for the amount of money that is withdrawn from the IRA account. There is an IRS form that you must complete which provides an explanation for why the penalty does not apply.

Reasons an IRA Premature Distribution Penalty Does Not Apply

If you become disabled before you reach age 59 1/2, you will not pay the penalty as long as you can provide proof from your physician that you are disabled. There is an IRS approved calculation method that is used to determine the amount of equal distributions over your life or that of your beneficiary that continues until you are 59 1/2, or within five years, whichever is longer.

Another option for avoiding the penalty is if the money is used to pay for medical expenses that exceed 7.5 percent of your adjusted gross income. This is certainly a welcome benefit for people who consider filing for bankruptcy because of medical bills. You can also use the withdrawal to pay the health insurance premiums for you, your spouse or dependents if you become unemployed and receive unemployment compensation for 12 straight weeks.