FAQs – IRA Distributions Prior to Age 59-½

Are there federal tax penalties for taking distributions from an IRA prior to age 59½?
Generally, taxable IRA distributions taken prior to age 59½ are subject to a 10% federal early withdrawal penalty.

How do I report and pay the 10% federal penalty tax on early withdrawals if I take a taxable IRA distribution prior to age 59½ and do not qualify for a penalty exemption?
If you take a taxable IRA distribution prior to age 59½ that is subject to the 10% federal early withdrawal penalty, you must file IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, along with your federal tax return to report the amount of penalty owed.

Are some types of distributions taken prior to age 59½ exempt from the 10% federal early withdrawal penalty?
Yes. There are several exceptions to the 10% federal early withdrawal penalty that generally applies to taxable IRA distributions taken prior to age 59½. These penalty exceptions generally apply to distributions taken for one of the following reasons:

• death of the IRA holder
• qualifying disability of the IRA holder
• substantially equal periodic payments
• certain medical expenses exceeding 7.5 percent of adjusted gross income
• health insurance if an individual has been receiving unemployment compensation for more than 12 weeks
• qualified higher education expenses
• qualified first-time homebuyer expenses
• conversion of Traditional IRA assets to a Roth IRA
• distributions due to IRS levy

Under what circumstances does a disability qualify an IRA holder from the 10% federal penalty on taxable IRA distributions taken prior to age 59½?
To qualify for exemption from the 10% federal early withdrawal penalty due to disability, an individual's disability must satisfy the definition of disability found in Internal Revenue Code (IRC) Sec. 72(m)(7). Generally speaking, to qualify for exemption from the 10% early distribution penalty by reason of disability, an individual's disability must preclude an individual from engaging in gainful employment and must be of long-continued and indefinite duration or expected to lead to death.

If I am a beneficiary under age 59½ taking distributions from a decedent's IRA, am I subject to the 10% federal early withdrawal penalty?
No. IRA distributions made to IRA beneficiaries after the death of an IRA holder are exempt from the 10% federal early withdrawal penalty that generally applies to distributions taken prior to age 59½. (Note: If you are a spouse beneficiary and you elect to roll or transfer distributions from your deceased spouse's IRA into your own IRA, subsequent distributions taken prior to age 59½ will not be eligible for exemption from the early withdrawal penalty due to death.)

Are IRA distributions taken prior to age 59½ for purposes of paying medical expenses exempt from the 10% federal early withdrawal penalty?
Under certain circumstances, distributions taken prior to age 59½ may be exempt from the 10% federal early withdrawal penalty provided they are taken to pay for qualifying medical expenses. To be eligible for this penalty exception, your medical expenses must generally exceed 7.5 percent of your adjusted gross income.

Are IRA distributions taken prior to age 59½ for purposes of purchasing health insurance exempt from the 10% federal early withdrawal penalty?
Under certain circumstances, distributions taken prior to age 59½ may be exempt from the 10% federal early withdrawal penalty provided they are taken to pay for qualifying health insurance premiums. To be eligible for this exception, you must generally have been receiving unemployment compensation for more than 12 weeks.

Is there an exception to the 10% federal early withdrawal penalty for taxable IRA distributions taken prior to age 59½ that are used to pay for higher education expenses?
Yes. IRA distributions that are used to pay for certain qualifying higher education expenses may be exempt from the 10% federal early withdrawal penalty that generally applies to taxable distributions taken prior to age 59½. In general, the term 'qualified higher education expenses' means tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible education institution. If the individual is at least a half-time student, reasonable costs for such period incurred for room and board while attending such institution are also considered qualified higher education expenses.

If I take a taxable distribution from my IRA prior to age 59½ to purchase a home, can I qualify for an exemption from the 10% federal early withdrawal penalty?
Perhaps. IRA distributions you use for qualified first-time homebuyer expenses are generally exempt from the 10% federal early withdrawal penalty. In addition, you may also qualify for a penalty exception for distributions used to pay the qualifying first-time homebuyer expenses of your spouse, children, grandchildren or ancestors of you or your spouse. There is an aggregate lifetime limit of $10,000 on the amount you can claim a penalty exception for based on the first-time homebuyer penalty exception.

What is the 'substantially equal periodic payments' exception to the 10% federal early withdrawal penalty?
Individuals who wish to begin taking regularly scheduled distributions from their IRA(s) prior to age 59½ can often avoid the 10% federal early withdrawal penalty provided they establish a distribution stream of payments that qualify as 'substantially equal periodic payments.' To qualify for exemption from the federal early withdrawal penalty under this exception, distributions must be based on either the single life expectancy of the IRA holder or the joint life expectancy of the IRA holder and his or her beneficiary. In addition, payments must be made no less frequently than annually and must continue for the longer of five years or until the IRA holder reaches age 59½. IRS Revenue Procedure 89-52 contains guidance on how to formulate distribution streams that can qualify for this penalty exception. (Note: Due to the complex nature of this penalty exception and the significant adverse tax consequences that can result if the exception is applied incorrectly, it is strongly recommended that individuals wishing to take advantage of this penalty exception seek the assistance of a competent attorney or tax advisor.)

This information is not intended to be legal or tax advice. Please consult a tax, legal, or financial professional with questions.

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