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Answered Question

lucydresd...

M$2 January 27, 2009 07:35 PM

How do I withdraw my IRA early?

Is it possible to withdraw my IRA early without a big penalty?

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cyberangel

January 28, 2009 03:25 AM

You can always withdraw early from an IRA, but are subject to a 10 percent penalty. There are numerous exceptions to the early withdrawal penalty.

First, you can elect to begin taking distributions annually over your life expectancy.

Example at age 58 is 27 years. With a balance of $500,000, you can free up around $19,000 penalty-free. If your situation gets better, you'll unfortunately have to continue making the withdrawals.

If you have any higher education expenses, withdrawals are penalty-free.

A withdrawal of up to $10,000 for a first-time home purchase is penalty-free.

A little more complicated planning may involve turning that IRA balance into a qualified retirement plan. Once the money is in the qualified plan, you can borrow $50,000, free of the penalty and income tax.

While this is a little more sophisticated, if you can accomplish this yourself, you can do it with little cost. You can even get a tax credit for half of the cost of setting up the retirement plan by filling out Form 8881.

In the event of serious illness or injury that requires prolonged or expensive medical treatment, Uncle Sam will waive the early withdrawal fee on the condition that the expenses are in excess of 7.5% of your adjusted gross income.

Source(s):
http://beginnersinvest.about.com/cs/iras/a/aairafees.htm

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jmbrown

January 28, 2009 03:28 AM

Normally withdrawing your IRA before you turn 59 1/2 years old means you have to pay regular income tax on the funds plus a 10% penalty tax (this is also called Early Distributions). There are a few ways to withdraw your IRA early without penalty.

Here's some info straight from the IRS (these tips are probably the most trustworthy, for more info check out the Form 5329 Instructions page: http://www.irs.gov/pub/irs-pdf/i5329.pdf ):

Beginning 2008, you can roll over (convert) from a qualified retirement plan to Roth IRA. Generally the 10% tax on early distributions does not apply to these rollovers.
Economic stimulus payments. If your economic stimulus payment was directly deposited into a tax-favored account (such as your individual retirement arrangement(IRA), Coverdell education savings account (ESA), Archer MSA, health savings account (HSA), or qualified tuition program (QTP) account), you can withdraw all or part of the payment. The amount withdrawn will not be considered as contributed to or distributed from the account and is not subject to any additional tax or penalty. The withdrawal must be made by the due date (including extensions) for filing your 2008 tax return. For a Coverdell ESA, the withdrawal can be made by the later of the above date or June 1, 2009.
Midwestern disaster relief. The additional tax on early distributions does not apply to qualified disaster recovery assistance distributions. See Form 8930, Qualified Disaster Recovery Assistance Retirement Plan Distributions and Repayments, for more information.
Kansas storms and tornadoes. The additional tax on early distributions does not apply to qualified recovery assistance distributions. See Pub. 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes, for more information.
A qualified disaster recovery assistance distribution. See Form 8930 for more details.
A qualified recovery assistance distribution. See Pub. 4492-A for more details.
An economic stimulus payment directly deposited into your IRA and withdrawn by the due date of your tax return (including extensions).
A qualified HSA funding distribution from an IRA (other than a SEP or SIMPLE IRA). See Pub. 969 for details.
A distribution from a traditional or SIMPLE IRA that was converted to a Roth IRA.
A rollover from a qualified retirement plan to a Roth IRA.

About.com lists the following circumstances when early withdraw does not result in a penalty:

You had a "direct rollover" to your new retirement account
You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days
You were permanently or totally disabled
You were unemployed and paid for health insurance premiums
You paid for college expenses for yourself or a dependent
You bought a house for the first time
You paid for medical expenses exceeding 7.5% of your adjusted gross income
The IRS levied your retirement account to pay off tax debts.

According to RetireEarly.com, there is a loophole known as the 72(t) exception (this information is current as of 2007): "Under current tax law (Internal Revenue Service Code Section 72(t)(2)(a)(iv)) you can avoid the 10% penalty tax if you take "substantially equal periodic payments." The Internal Revenue Service 1989 Cumulative Bulletin (Notice 89-25 on Page 666) tells you how to calculate what it considers to be "substantially equal periodic payments". IRS Revenue Ruling 2002-62 adds additional details and clarifies some issues pertaining to IRA early withdrawals. All of these engrossing volumes are very likely available at your local law library."

You should really talk to your accountant or tax professional to find your best course of action but I hope these tips are a helpful starting point. Good luck.
Source(s):
http://www.irs.gov/publications/p590/ch04.html
http://taxes.about.com/b/2008/09/22/taking-early-distributions-from-an-ira....
http://www.irs.gov/taxtopics/tc451.html
http://www.irs.gov/pub/irs-pdf/i5329.pdf

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