Eight IRA Penalty Exemptions

Penalties and fees can be incredibly discouraging to IRA owners. Fortunately there are a few exemptions to these penalties that every IRA contributor should be aware of. Consider withdrawing monies from an IRA carefully as withdrawing early can significantly decrease earnings potential. Years of earnings can be lost by withdrawing IRA monies early, and this can be significantly difficult to make up.

• Death of the IRA owner

If the owner of the IRA dies or becomes permanently disabled, money can be withdrawn penalty free.

• Permanent disability of the IRA owner

If the IRA owner becomes permanently disabled, money can be withdrawn penalty free.

• Medical Expenses Incurred
  

If a serious injury or illness is prolonged or causes expensive medical treatment, money withdrawn penalty free. However, the expenses must be in excess of 7.5% of your adjusted gross income.

• Higher education expenses
  

Money withdrawn to cover education costs for the IRA owner, the owners spouse, children, or grandchildren can be done penalty fee, but not tax free. Read more about this particular situation at the IRA site Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.

• First time home purchase

A maximum of $10,000 can be withdrawn penalty free for a first time home purchase.

• Pay back taxes after a levy has been placed against the owner's IRA

Not exactly the best exemptions, however, it can save some money.

• Withdrawals to pay medical insurance premiums

If you are unemployed, money withdrawn from your IRA to pay medical insurance premiums will not be penalized. You must be unemployed, however.

• Withdrawals of contributions made on or after the day the IRA owner turns 59 1/2

The contributions made on or after the day the IRA owner turns 59 1/2 are penalty free because age at which distributions can be taken has been reached.


A Tricky Issue

For money in an IRA to be eligible for penalty exemptions, it must have been in an IRA account for at least 5 years. So, an IRA owner cannot make a contribution one year and then withdrawal it the next year using a penalty exemption.


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