The following is a summary of the penalty tax exceptions. For more details, see IRS Publication 590-B at www.irs.gov or a competent tax advisor.

Age 59½

When you are 59½ or older, your distribution is penalty-free.

Higher education expenses

Your distribution may be penalty-free for certain expenses (e.g. tuition, books, supplies) at certain colleges and other postsecondary institutions. The penalty exception can apply to expenses for you, your spouse, children or grandchildren.

First time home purchase

Up to $10,000 of your distribution may be penalty-free if used to buy, build or rebuild your first home. There is a lifetime limit of $10,000 for the penalty exception and “first home” means that you have not owned a home in the prior two years. The funds must be used within 120 days after you receive them. The penalty exception can apply to a first home for you, your spouse, your or your spouse’s children or grandchildren and your or your spouse’s parents. Note that the individual who must meet the definition of a first-time homebuyer is the person acquiring the home–not the IRA owner.

Medical insurance

Your distribution may be penalty-free if used to pay health insurance premiums when all of these conditions are met:

– You lost your job;
– You received unemployment compensation for at least 12 consecutive weeks;
– Your distribution is taken in the same or following year that you receive unemployment compensation; and
– Your distribution is taken no later than 60 days after you are reemployed.

Unreimbursed medical expenses

Your distribution may be penalty-free on certain unreimbursed medical expenses that exceed 7.5% of your income if you’re under age 59½. The distribution must be made in the year that the expenses are paid.

EXAMPLE

Charlie is 50. His unreimbursed medical expenses are $6,000, his income is $40,000, and he takes an IRA distribution. The maximum amount that Charlie may consider as a penalty-free distribution is $3,000 ($6,000 – [7.5% x $40,000] = $3,000).

Military reserve

Your distribution may be penalty-free if you are a member of the military reserve; were called to active duty for at least 180 days (or for an indefinite time) after September 11, 2001; and the distribution was taken while you were called to active duty.

Substantially Equal Periodic Payments

Your distribution may be penalty-free if it is part of a series of Substantially Equal Periodic Payments (SEPP). SEPP distributions must occur annually and for five years or until you turn 59½, whichever is later. If distributions are modified, the 10% penalty tax, plus interest is applied retroactively to all previous distributions.

Disability

Your distribution may be penalty-free if you are unable to engage in any substantial gainful activity. A physician must certify that your disability will be long-term; continuous; of an indefinite duration; and is expected to lead to death.

IRS Levy

Your distribution is penalty-free if it occurs as a result of an IRS tax levy.

Death

Your distribution is penalty-free if you inherited the IRA and the distribution is taken from the deceased’s IRA.