Will a Distribution from my Traditional IRA be Penalty Free?

Traditional IRA’s are meant to be funds used for retirement, with access to these funds typically only allowed after age 59.5.  However, in times of hardship some clients find that they might need or want access to these funds to be used now.  Usually for non-qualified withdrawals there is a sizeable 10% penalty, but some situations allow for early withdrawals.  Will your withdrawal be penalty free?

Were non-deductible contributions ever made to the IRA?

Most contributions to Traditional IRAs are deductible, so most clients take the opportunity to reduce their taxes.  If you have made non-deductible contributions, part of the distribution will be nontaxable based on a pro-rated basis. 

Are you age 59.5 or older?

If you are, then any withdrawals you make will be qualified.  You will be taxed at ordinary income rates, but no penalty will be due.  If you are under 59.5, move on to the next question.

Do you have medical insurance premiums after losing a job, higher education expenses, or are disabled?

If you answered “yes” to any of the above, you will not have any penalty, but it is still taxable as ordinary income.  If you don’t meet any of the exceptions listed above, you are likely going to have to pay a 10% penalty on top of any tax due.

There are several more qualifying exclusions that allow for penalty free withdrawals from your Traditional IRA, but they can be complicated.  If you are considering withdrawing funds prematurely from your IRA and are seeking advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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