Tuesday, February 20, 2007

IRAs: Age 59 1/2 Rule

Lets talk about the Rule 59 1/2, which applies to all types of IRAs. Rule 59 1/2 states that if you make any non-qualifying withdrawals before age 59 1/2, you will be subjected a 10% early withdrawal penalty. You should know that the IRS does not prohibit you from withdrawing money. You can make withdrawals at anytime, but you may pay a penalty and possibly income tax. So, what is considered a "qualified" withdrawal?

1) You may make withdrawals before age 59 1/2 if you become permanently disabled.
2) If you die before age 59 1/2, your estate or your beneficiary will not be affected by the rule.
3) You may make withdrawals to pay for non-reimbursed medical expenses IF AND ONLY IF the expenses exceeds 7.5% of you adjusted gross income (AGI, which means your gross income after all qualifying deductions are made)
4) You may make withdrawals up to $10,000 for purchase, building, or rebuilding of your first home. This can include children, grandchildren, and your spouse if you already bought your first home.
5) You may make withdrawals to pay for higher education expenses. This can include you, your children, and your grandchildren.
6) If you are out of a job and have medical insurance, you may make withdrawals to pay the premium.

In Tradional IRAs, when you start withdrawing money, you will owe income taxes on them EXCEPT on the part where your contributions were not tax-deductible. Remember about the age 59 1/2 rule, if you make non-qualifying withdrawals you will owe 10% penalty tax and income tax on deductible contributions and earnings. Click here to learn more about Traditional IRAs.

In Roth IRAs, when you make withdrawals after age 59 1/2, you may not owe any taxes, depending on when you open the Roth IRA. You may also withdraw your contributions anytime, even before Age 59 1/2 and you won't owe any taxes or penalties! Click here to learn more about Roth IRAs.