Rules for Withdrawing an IRA

There are eight exceptions to the rule that you must wait until 59 1/2 years old before making a withdrawal. Since a considerable sum of money could be involved with any of these exceptions, check first with your tax adviser. 1. If your medical expenses exceed 7.5 percent of your adjusted gross income, you can make a penalty-free withdrawal from your IRA. 2. If you lost your job and paid your medical premium yourself, you can withdraw that premium penalty-free from your IRA until you find another job. 3. If a physician certifies you cannot work, you can withdraw funds from your IRA penalty-free. 4. If you die with an IRA, it can be distributed to your heirs penalty-free. 5. You can pay college tuition with distributions from your IRA penalty-free. 6. You can withdraw up to $10,000 from your IRA penalty-free for the purchase of a home, or 2 years after you have sold it. 7. If you roll over your IRA to another retirement plan, it is not subject to the 10 percent penalty. 8. If you begin taking essentially the same amount from your IRA before you are 59 1/2, and do so for 5 or more years, those distributions will be made penalty-free.

Once you reach 70 1/2 years of age, you must begin taking distributions from your traditional IRA. The federal government makes available its so-called Minimum Distribution Requirement (MDR), which is based on a mortality table. On it, you can easily figure the percentage of your IRA that needs to be distributed by April 1 of the year following the year you reach 70 1/2. Failure to take those distributions results in a penalty of 50 percent of that amount.

If you have a Roth IRA, you are not required to take a distribution, even upon reaching 70 1/2 years of age. Roth IRAs are different from traditional IRAs in that contributions to them are taxable when they are made but are allowed to accumulate tax-free. Therefore, there is no obligation to begin making withdrawals. However, withdrawals before becoming 59 1/2 years of age are subject to a 10 percent penalty unless they are made because you are disabled, if you are a first-time home-buyer or the proceeds are distributed to your heirs if you are deceased.

If your employer has set up a so-called "simple IRA" for you, the same rules and exceptions apply that apply to a traditional IRA. However, if you should withdraw money within 2 years of it having been established, the penalty is raised to 25 percent.

IRAs have become the most popular way for people to accumulate funds for retirement since defined benefit retirement plans are no longer widely available. People with IRAs will not have problems with the penalties exacted by the IRS if they simply follow the rules.