Individual Retirement Accounts » Traditional Rollover or Contributory IRAs

Penalty-Free Traditional IRA Distributions

Age 59-1/2-Internal Revenue Code (IRC) Sec. 72(t)(2)(A)(i) – As defined by the IRS, age 59 1/2 is when an individual can take a distribution from their IRA without penalty. Distributions taken after age 59-1/2 will only be subject to ordinary federal income tax.

Death-IRC Sec. 72(t)(2)(A)(ii) – There is no 10% penalty if a distribution is made after the death of the individual.

Disability-IRC Sec. 72(t)(2)(A)(iii) – The IRS definition of disability is much stricter than the Social Security definition. The IRS defines disability as unable to perform substantially gainful activity because of a medical condition. A physician must determine that the condition can be expected to result in death or to be of continued and indefinite duration. Refer to IRC 72(m)(7) for the definition of disability.

Medical Expenses-IRC Sec. 72(t)(2)(B) – Medical expenses in excess of 7-1/2% of AGI would qualify as a valid reason for distribution from an IRA without penalty. Health care expenses would include expenses for the individual, his/her spouse, or his/her immediate dependents. This would include children or elders who solely depended on the provider. The distributions must qualify as medical deductions that could be itemized as defined by the IRS.

Health Insurance Premiums-IRC Sec. 72(t)(2)(D) – The 10% early distribution penalty does not apply if distributions are made to pay health insurance premiums. However, in order to qualify, the individual must have received unemployment compensation for 12 weeks and the distribution must be made in the year, or the year immediately following the year, the unemployment compensation was received. The exception ceases to apply if the individual was gainfully employed for 60 days or more.

Higher Education-IRC Sec. 72(t)(2)(E) – Distributions from IRAs which are used to pay qualified higher-education expenses escape the 10% early withdrawal penalty. This applies to expenses incurred by the taxpayer, his/her spouse, his/her children, or his/her grandchildren. Qualified expenses include tuition, books, fees, supplies, equipment, computer technology and, if enrolled more than half time, board.

First Time Home Purchase-IRC Sec. 72(t)(2)(F) – If an individual takes a distribution from their IRA for the purpose of purchasing a first home, the distribution is exempt from the penalty. A first-time homebuyer is any individual who has had no ownership interest in a property in the past two years. However, individuals can only withdraw a lifetime maximum of $10,000 penalty-free under this exception.

Substantially Equal Periodic Payments-IRC Sec. 72(t)(2)(A)(iv) – Substantially equal periodic payments distributed from an account not less than once annually for the greater of 5 years or until at least the age of 59-1/2 avoid the 10% penalty for early withdrawal. These distributions must be a calculated according to specific methods as defined by the IRA.

IRS Levy – Distributions that are taken from an account due to an IRS levy will not be subject to a 10% penalty for early withdrawal. However, ordinary income taxes still apply.

Required Minimum Distributions (RMDs) – While the government allows deferral of taxation, a Traditional IRA owner cannot avoid taxation completely. Once an account holder turns 70-1/2, he/she has reached the age when the government mandates withdrawals from a tax-deferred investment (not required on Roth IRAs).

These mandatory withdrawals are referred to as Required Minimum Distributions (RMD).
The IRS has dictated that these distributions can be deferred until April 1st of the year following the year that the individual turns 70-1/2. This is called the Required Beginning Date (RBD). The amount that must be withdrawn is based on IRS-approved life-expectancy tables.

In Traditional IRAs, individuals can combine their retirement savings across multiple IRAs and take a withdrawal from one account in order to satisfy RMD amounts.