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Penalty-free IRA distributions possible: medical bills, disability, education might quality.

Individual Retirement Accounts (IRAs) were established by Congress in 1974, as part of the Employee Retirement Income Security Act, often referred to as ERISA. As originally contemplated, the amount inside the IRA would grow without being immediately taxed, a concept referred to as "tax deferred."

Generally, money withdrawn from a retirement account, regardless the reason, is subject to income taxes as ordinary income. However, if the money is taken out before age 59 1/2 (age 55 in some cases), a 10-percent excise tax penalty is applied to the amounts withdrawn.

An excise tax cannot be offset by deductions or personal exemption, a fact that catches many unsuspecting taxpayers by surprise. However, Congress also left the door open for withdrawals before retirement without penalty.

Money can be withdrawn from an IRA one time per year for up to 60 days without either penalty or tax. Recent rulings by the IRS aggregate all IRA and retirement accounts to count as one IRA for application of the 60 day rule. If the money is not back in the account by the 60th day --and the IRS accepts no excuses--all taxes apply.

Under certain circumstances the IRS will waive the 10-percent early withdrawal penalty.

If you have unreimbursed medical expenses from lack of health insurance, or more than your insurance will cover, you may take penalty-free withdrawals from your IRA to cover these expenses. Note, however, that only the difference between the amount of these expenses and 7.5 percent of your adjusted gross income (AGI) is eligible for this exception.

If you are unemployed, you may take penalty-free distributions from your IRA to pay for your medical insurance providing, you have 1) lost your job, 2) received unemployment compensation paid under any federal or state law for 12 consecutive weeks during either the year you received the unemployment compensation or the following year.

If you are disabled, as determined by a physician who certifies that, because of a mental or physical disability, you are unable to engage in any gainful employment, you are allowed to take penalty-free withdrawals from your IRA. You may have to provide your IRA custodian with proof of disability in the form of a physician's certification.

Penalty-free withdrawals are also available if you need to pay eligible educational expenses for higher education, i.e. college for you, your spouse, or the children or grandchildren of you or your spouse.

If you are the non-spousal designated beneficiary of a deceased person's IRA, amounts you withdraw from the inherited IRA are not subjected to early-withdrawal penalties. To ensure that the IRS knows that the amount is not subjected to the early-withdrawal penalty, your IRA custodian/trustee should report the withdrawn amounts as death distributions.

First time home buyers may withdraw up to $10,000, penalty free, to cover purchase costs including closing costs and fees. The IRS specifies your home as a first-time home if you or your spouse has not owned a home for the past two years. The $10,000 has a once-per-lifetime limit. If you are married, your spouse is also entitled an additional $10,000 giving the married couple the opportunity to use $20,000.

Finally, if you need to take money from your IRA for a few years, the IRS allows you to do so penalty-free if you meet certain requirements. You may withdraw the same amount, determined by using one of three IRS approved methods, until you are either age 59 % or for five years, whichever comes last. These calculations are relatively complex. If you are considering taking such withdrawals from your IRA, I strongly recommend you seek competent tax advice.

Wendell Cayton is an independent Registered Investment Advisor Representative of Wealth Management Advisors LLC, a registered investment advisor firm registered in Washington and California. His views are his alone and not those of any company with whom he may be associated. This writing is intended for general planning purposes. Cayton does not give legal or tax advice. Those seeking such advice should consult appropriate professionals. He can be contacted at His website is
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Title Annotation:TAKING STOCK
Author:Cayton, Wendell
Publication:Wenatchee Business Journal
Date:Mar 1, 2016
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