What's a premature IRA distribution, and what happens if I make one?
A premature IRA distribution occurs when you take money from your IRA before reaching age 59½. If you are under 59½ and withdraw funds from your traditional IRA, you'll probably have to pay a 10 percent penalty tax on the taxable portion of your withdrawal, on top of whatever income taxes you owe on the distribution. This can be a major drawback for IRA owners who need money and have few other assets to draw on. There are a number of exceptions to this rule, however. You may qualify under one of these exceptions to make penalty-free IRA withdrawals.
Premature IRA withdrawals made by a disabled person may be exempt from the penalty. If an IRA owner dies before reaching age 59½, distributions paid to you as a beneficiary 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 you're unemployed, higher education costs, qualified first-time home-buyer expenses (up to $10,000 lifetime from all of your IRAs), and qualified reservist distributions. The penalty tax 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, or to amounts that the IRS levies from your IRA to cover your tax bill. Other exceptions may also apply.
Qualified distributions from your Roth IRAs are federal income tax--and penalty tax--free. Distributions are qualified if you satisfy a five-year holding period, and you are (a) age 59½, (b) disabled, (c) deceased, or (d) you have qualified first time home-buyer expenses. The taxable portion of nonqualified distributions from your Roth IRAs is subject to the same 10 percent penalty rules that apply to traditional IRAs. (Special rules may apply if you take a nonqualified distribution from your Roth IRA within five years of a conversion.)