Your IRA Money C=
an
Help Out
=
When
you take money out of an individual retirement account before you reach age
59½, the Internal Revenue Service considers these premature
distributions. In addition to owing any tax that may be due on the money, y=
ou'll
face a 10 percent penalty charge on the amount.
=
But
there are times when the IRS says it's OK to use your retirement savings ea=
rly.
=
Two
popular, penalty-free withdrawal circumstances are when you use IRA money to
pay higher-education expenses or to help purchase your first home.
OK for school
When it comes to school costs, the IRS says no penalty will be assessed as =
long
as your IRA money goes toward qualified schooling costs for yourself, your
spouse or your children or grandkids.
=
You
must make sure the eligible student attends an IRS-approved institution. Th=
is
is any college, university, vocational school or other post-secondary facil=
ity
that meets federal student aid program requirements. The school can be publ=
ic,
private or nonprofit as long as it is accredited.
=
Once
enrolled, you can use retirement money to pay tuition and fees and buy book=
s,
supplies and other required equipment. Expenses for special-needs students =
also
count. And if the student is enrolled at least half-time, room and board al=
so
meet IRS expense muster.
First-home exemption
Then there's your home. Uncle Sam offers various
tax breaks to homeowners. He'll even bend the IRA rules a bit to help y=
ou
get into your house in the first place.
=
You
can use up to $10,000 in IRA funds toward the purchase of your first home. =
If
you're married, and you and your spouse are both first-time buyers, you each
can pull from retirement accounts, giving you $20,000 in residential cash. =
=
Even
better is the IRS definition of first-time home buyer. Technically, you don=
't
have to be purchasing your very first abode. You qualify under the tax rule=
s as
long as you (or your spouse) didn't own a principal residence at any time d=
uring
the previous two years. In fact, you can even share your IRA wealth. The IRS
says the first-time home buyer using your IRA funds for a down payment can =
be
you, your spouse, one of your children, a grandchild or a parent.
=
Be
careful not to take out your money too soon. You must use the IRA funds wit=
hin
120 days of withdrawal to pay qualified acquisition costs. This includes the
costs of buying, building or rebuilding a home, along with any usual
settlement, financing or closing costs.
Different treatment for Roths
These home-buying IRA options apply to traditional retirement accounts. The
rules are a bit different if your nest egg is in a Roth IRA.
=
The
$10,000 you take out for your first home is a qualified distribution as lon=
g as
you've had your Roth account for five years. This means you can take out yo=
ur
retirement money without penalty, and because Roth earnings are tax-free,
you'll have no IRS bill either.
If, ho=
wever,
your Roth IRA is a newer account, the withdrawal is an early distribution. =
Many
people will find themselves in this situation, since R=
oths
weren't created until 1998. As with a traditional IRA early withdrawal, a R=
oth
holder can use the first-home exception to avoid the 10 percent penalty, but
might owe tax on earnings that are withdrawn.
Allowable, but not preferable, distributions<=
/u>
Early IRA withdrawal=
s also
are penalty free in a few other instances. Unfortunately, most of these are
hardship situations that no taxpayer wants to face:
=
· =
&nb=
sp;
Payment
of excessive unreimbursed medical expenses.
=
· =
&nb=
sp;
Payment
of medical insurance premiums while unemployed.
=
· =
&nb=
sp;
Total
and permanent disability.
=
· =
&nb=
sp;
Distribution
of account assets to a beneficiary after you die.
You al=
so can
get IRS-approved early access to your nest egg if you take IRA money on a
specific schedule. Known as substantially equal periodic payments, this met=
hod
allows you to begin withdrawing from your IRA early as long as the amounts =
are
determined by an IRS-calculated life-expectancy table.
Finall=
y,
keep in mind that the early-withdrawal exceptions do not eliminate your tax
bill if you take the money out of a traditional IRA. Unlike Roth accounts w=
here
you eventually can withdraw your money tax-free, taxes are merely deferred =
on
traditional IRAs. So when you take the money out of such an account, regard=
less
of your age or the purpose of the withdrawal, you'll owe your regular tax rate on the amount.
But the
early-withdrawal exceptions do protect you from paying the IRS more in pena=
lty
charges. To let the IRS know that you used the retirement money early for a
tax-acceptable purpose, file Form 5329. When you report your withdrawal here, you'=
ll
also enter a code, found in the form's instructions, that lets the IRS know=
the
distribution is penalty free.