Can I avoid the 10 percent penalty tax for early withdrawals from a traditional IRA?
Possibly. In most cases, the IRS imposes a 10 percent penalty tax on the taxable portion of withdrawals made from traditional IRAs prior to reaching age 59½. This penalty can be a major drawback for IRA owners under age 59½ who need money and don't have other assets to draw on. There are a number of exceptions, however. Depending on your circumstances, you may qualify under one of these exceptions to make a penalty-free IRA withdrawal, although you may still have to pay income tax on all or part of the amount withdrawn.
Premature IRA withdrawals made by a disabled person may be exempt from the penalty. If an IRA owner dies prior to age 59½, distributions paid to you as a beneficiary of the account are not subject to the penalty. If you need supplementary income, you can take IRA distributions as a series of substantially equal payments over your life expectancy or the joint life expectancy of you and your beneficiary. These distributions will avoid the penalty as long as you don't modify the payments within certain time frames. Subject to limits and conditions, the penalty tax generally will not apply to IRA distributions taken to pay qualifying medical expenses, health insurance premiums while unemployed, higher education costs, and qualified first-time home-buyer expenses (up to $10,000 lifetime from all of your IRAs). It also does not apply to amounts rolled over from one IRA to another (assuming you follow the rules for rollovers), to conversions of traditional IRAs to Roth IRAs, to amounts that the IRS levies from your IRA to cover your tax bill, or to qualified reservist distributions.
Other exceptions may also apply. Moreover, Roth IRAs are subject to special rules of their own.