Early Withdrawal Penalty Exceptions

San Jose Tax Lawyers – Taxable withdrawal from your Traditional IRA account can make a big difference in the amount of tax that you will pay.

However, if you have no alternatives, it may be possible to avoid part or all of the penalties by carefully planning the withdrawals so that they qualify for one or more of the early withdrawal penalty exceptions:

(1) amounts withdrawn to pay un-reimbursed medical expenses

(2) amounts withdrawn while qualifying as disabled

(3) amounts withdrawn and used to pay for medical insurance while unemployed

(4) amounts used to pay higher education expenses

(5) amounts up to $10,000 for the purchase of a first home

(6) early retirement amount withdrawn as an retirement annuity.

For retired individuals who are receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when half of the taxpayer’s Social Security benefits added to the taxpayer’s other income exceeds $25,000 (or $32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50 to 85 cents of the individual’s Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally a good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. Retirees with income that already puts them over the Social Security taxable threshold should avoid large, uneven withdrawals that might push them into a larger tax bracket one year and way below that tax bracket change in other years.

Remember: Once a taxpayer reaches age 70 ½, he or she must begin taking distributions equal to or greater than the Required Minimum Distribution, which somewhat limits planning options.

To find out more about IRA funding, be sure to check out Forecasting Your Taxable IRA Withdrawals.