Tax-free IRA withdrawals
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February 3, 2000: 5:01 p.m. ET
Expert advises on how to withdraw from your IRA - minus the tax penalty
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NEW YORK (CNNfn) - It's always confusing to figure out when you can make an early withdrawal from a retirement account and one of the biggest dangers is facing steep penalties from the IRS.
In response to a reader's question, Roy Diliberto, a certified financial planner from Philadelphia and a member of the Financial Planning Association, said there are some exceptions that allow you to take money out of your plan.
Ask the expert a question about your retirement plan.
Q: If I withdraw money early from a Traditional IRA, I know that I must pay a 10 percent penalty. The question is, is the penalty 10 percent of the amount withdrawn or 10 percent of the amount of tax due on the withdrawn amount?
A: The 10% penalty is on the amount you withdraw.
You can take money out of your IRA without the penalty if you need it for medical expenses that are in excess of 7.5 percent of your adjusted gross income. Or, if the money is to pay medical insurance premiums after you leave your job and have gone through 12 consecutive weeks of unemployment compensation.
You can also make a withdrawal if it's for education expenses, defined as tuition, books, fees, supplies, and equipment required for enrollment.
First-time home buyers can take out up $10,000 for the purchase of a home.
If you're disabled, you can also make withdrawals without penalty. You'll just pay taxes on the amount you take out.
Here's another example of how you could withdraw money without a penalty.
Let's assume you're 40 years old and starting a new business. You need some extra income for a few years, and the only money you have is in your IRA. You could take a series of equal periodic payments, at least annually, based on your life expectancy for at least five years or until age 59-and-a-half, whatever is later.
These withdrawals could be the perfect way to fund this transition without paying penalties.
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