Exceptions to IRA early withdrawal penalty tax

In most cases, you will be subjected to a 10% penalty tax on withdrawals made from an IRA account (for a ROTH IRA, this penalty is levied on the earnings only) if the withdrawals are made prior to age 59 1/2.  Keep in mind that you will always pay regular income taxes on withdrawals from traditional IRA accounts if you were able to deduct all of your contributions and that there are no exceptions to this.  If you did not deduct all of the contributions the situation is a bit more complicated.  There are, however several exceptions which will allow you to avoid paying the 10% penalty tax.  In this article we will cover three of these exceptions:  an exception related to being a first time home buyer, an exception related to qualified higher education expenses, and an exception which relates to taking equal periodic payments from your account.

First time home buyer exception

If you are using the IRA funds for a down payment on your first home, you may withdraw up to $10,000 without paying the 10% penalty tax.  You will, however, still have to pay income taxes.  In order for the home purchase to qualify as a first time home purchase, you must not have owned a home within the previous two years.  If you are married you and your spouse may each withdraw up to $10,000 from your IRA for the purpose of making a first time home purchase.

Higher education expense exception

If you withdraw funds from your IRA to pay for qualified higher education expenses of yourself, your spouse or your child you will not have to pay the 10% early withdrawal penalty tax.  Qualified higher education expenses include tuition, books, supplies and equipment required for enrollment at an eligible higher education institution.

Equal periodic payments exception

There is another exception to the early withdrawal penalty which involves taking equal periodic payments from the retirement account beginning at a time prior to age 59 1/2 and continuing for 5 years or until age 59 1/2, whichever is later.  The rules for using this exception are complex and we emphasize the importance of  consulting with a financial or tax adviser when using this exception.