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Tax-deferred accounts like a traditional IRA come with a caveat: strict IRA distribution rules, both before and after retirement.
Traditional IRA early withdrawal rules
Under traditional IRA distribution rules, withdrawals taken before age 59½ will be taxed at ordinary income tax rates and penalized 10% for early withdrawal. While you can’t avoid taxes on a traditional deductible IRA distribution — no matter when you take it — there are exceptions that skirt the 10% early withdrawal penalty.
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Withdrawals that avoid the 10% penalty
Qualified higher education expenses
IRA distribution rules allow you to use traditional IRA money to pay for higher education expenses not only for yourself, but also for immediate family members (your spouse, children and grandchildren). There is no dollar limit, and expenses that fall under this rule include tuition, fees, books and supplies. Room and board is also allowed for students who are attending more than half time.
You can use up to $10,000 from your traditional IRA toward the purchase of your first home — and if you’re purchasing with a spouse, that goes for each of you.
The IRS’ definition of first home is pretty loose: You’re considered a first-time homebuyer under this rule if you or your spouse hasn’t owned a principal residence in the last two years. You must use the money within 120 days of the distribution, so time your withdrawal carefully.
If you’re feeling generous, you can also use this exception to purchase the first home for your or a spouse’s child, grandchild, parent or other ancestor.
Birth or adoption of a child
In the year following the birth or adoption of your child, you can withdraw up to $5,000, without penalty. If married, each spouse can withdraw up to $5,000 from their own IRAs. This provision, which went into effect January 1, 2020, was part of the Secure Act. The law allows people who take an early withdrawal for this reason to put the money back into a retirement account without the payback counting toward your annual contribution limit for the year.
Medical expenses and health insurance premiums
You’re allowed a distribution to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, or to pay for health insurance premiums for you, your spouse or children when you are unemployed.
A couple of things to note about IRA distribution rules here: Traditional IRA money can be used to pay for the portion of the medical expenses that tops 7.5% of your adjusted gross income, meaning if you make $100,000 and have $15,000 in unreimbursed medical costs, you can use IRA assets to pay for $7,500 of it.
Substantially equal payments
You don’t have to pay the 10% penalty if you start a series of distributions from your IRA that are spread equally over your life expectancy.
The fine print: If you turn this fire hose on, you can’t turn it back off — you must take at least one distribution each year, and you can’t modify the schedule of payments until five years have passed or you’ve reached age 59½, whichever is later.
The amount of the distributions must be based on an IRS-approved calculation that involves your life expectancy, your account balance and interest rates.
Qualified reservist distributions
If you’re in the military and you are called to active duty for more than 179 days, you can take a penalty-free distribution from your IRA. The withdrawal must be made during the period of active duty; in other words, you can’t take it earlier than the date of the call to serve, or later than the close of the active-duty period.
Death or total and permanent disability
The IRS is stingy about access to IRA cash, but it isn’t unreasonable. If you become disabled, IRA distribution rules say you can tap traditional IRA funds without penalty. If you die, your account beneficiary or estate will be able to do so.
Traditional IRA required minimum distribution rules
The IRS will let you defer taxes for only so long — when you reach age 72, it starts itching to get its money. It gives you a shove in the form of required minimum distributions, which must begin by April 1 of the year following the year when you turn 72. (Note: The age limit used to be 70½, and that limit still applies to anyone who turned that age in 2019.)
You must continue to take distributions for each year by Dec. 31. That means you could end up taking a double distribution the first year — one if you wait till the calendar year after turning 72 to start by the April 1 deadline, the second by the following Dec. 31. If you don’t take your RMDs on time, you’ll pay a stiff penalty of 50% on the amount not withdrawn.
The amount of the distribution is calculated by dividing your account balance by a life expectancy factor published by the IRS here. You can always elect to take more than the RMD, but keep in mind that traditional IRA distributions are taxed as income.
Finally, if you’re between 59½ and 72, you’re in that sweet spot when you can do what you want — you don’t have to take distributions from the account, and leaving that money as is will allow it to continue to grow tax-deferred. If you do want to begin distributions, you can. You’ll pay taxes, but no penalty.
Want more context?
Now that you've got the lay of IRS law on traditional IRA distributions, breeze through this refresher on other rules to know about eligibility, deduction limits and more.