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IRA Distribution Rules are a mine field. One incorrect move and you could discover yourself faced with high taxes and penalties that could wipe out years of savings and investment. Complicating issues is the Darwinian evolution of IRAs which have taken place since the pioneer IRA was introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA ). Since ’74, IRA rules have altered dramatically and legislation was enacted to rigorously punish those who don’t follow the policy, to the letter of the law. IRAs come in lots of flavors but, for reasons of this article we’ll focus on the 2 main kinds of IRAs: Traditional IRAs and Roth IRAs.

Methods for Minimizing Penalties on Early Distributions

Usually, any distribution from an IRA before you reach age 59 1/2 is considered an early distribution and is matter of a 10 percent penalty on the taxable quantity received in a distribution. There’re specific Roth IRA information that could be used to avoid the imposition of this early withdrawal penalty.

1. Using IRA Funds to Purchase or Construct Your First Home – Up to $10,000 may be withdrawn from an IRA as an early distribution penalty-free, as long as the distribution is used to buy, build or repair a first house for yourself, your spouse, you or your spouse’s child, you or your spouse’s grandchild or you or your spouse’s parent or ancestor.

2. Using IRA Funds for Medical Bills – Penalty-free early distributions could be made if the funds are used to pay unreimbursed medical bills which exceed 7.5 % of your adjusted gross earnings. There is no obligation to itemize deductions to be eligible for this exception.

3. Using IRA Funds for School Expenses – Conventional IRAs can also be tapped to help fund school expenses; however, the taxable amount of the distributions from these IRAs will be matter of income tax in the year of the distribution.

Roth Ira Eligibility

Roth IRAs have unique rules with respect to distributions. Contributions withdrawn are not matter of the 10% penalty and there is no RMD with Roth IRAs. So as for Roth IRA earnings distributions to be tax-free, the account should have been opened for five years and the distributions must be made after reaching age 59 1/2. If you meet the five-year rule but not the 59 1/2 year rule, distributions in excess of your contributions will be taxable and matter of a 10% penalty.

1. No RMD – With Roth IRAs, there’s no RMD at age 70 1/2. This means a Roth IRA owner is never needed to make a distribution out of their Roth IRA. As a result, Roth IRAs can grow, untaxed, during the lifetime of the owner, permitting a larger legacy for their beneficiaries.

2. Zero Percent Effective Tax Rate – Qualified distributions from Roth IRAs aren’t subject to income tax…ever. This means you’re unaffected by future tax increases as your effective tax rate is always the same…zero.

3. Conversion Chances – Beginning after January 1, 2010 anybody, irrespective of their income level, may convert conventional IRAs into Roth IRAs. The tax on the taxable income for 2010 conversions can be delayed into 2011 and 2012. If you don’t have sufficient money set aside to do a 100% conversion you can do partial conversions.

4. College Expenses – Because Roth IRA contributions might be withdrawn, tax-free, penalty-free, at any time, this kind of contributions can be a tax-free future funding source for your child’s school expenses.