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Four Ways to Tap an IRA Early

Naturally, the money you contribute to an IRA is sheltered from current tax ... unless you need to tap into your account early. If that happens, you must pay the IRS a 10% penalty in addition to the regular income tax you owe at ordinary income rates. The penalty generally applies to distributions made before age 59½.

However, there are several key exceptions to the early withdrawal penalty. Here are four ways you may be able to withdraw funds from an IRA penalty-free.

1. Substantially equal payments: You are not liable for the penalty if you take "substantially equal periodic payments" based on your life expectancy or the joint life expectancies of you and a designated beneficiary. The payments must last for at least five years or until you reach age 59½--whichever comes later. Also, you must receive at least one payment per year.

There are three permissible methods for computing the required payments under IRS‑approved life expectancy tables. Consult with a professional tax adviser for the best method for your situation.

2. Medical expenses: If your family has been hit with some unexpected medical bills, you may not have all the cash you need. In that case, you can withdraw funds from your IRA to pay for those medical expenses. The withdrawals are exempt from the 10%

penalty to the extent that the cost qualifies for the medical expense deduction (i.e., unreimbursed medical expenses above 7.5% of your adjusted gross income). Similarly, if you are laid off or fired from your job, any pre-age-59½ withdrawals are exempt from the tax penalty if the funds are used to pay for health insurance coverage.

3. Home purchases: The tax law includes a special tax break for "first-time homebuyers." No penalty is imposed on pre-age-59½ withdrawals if the funds are used to buy or build a qualified home. To qualify, the home must be used as your principal residence, and you cannot have owned a home within the last two years.

Best of all, the tax break is available for other family members such as your child. However, be aware that there is a lifetime dollar cap of $10,000 on this first-time homebuyer exception.

4. Education expenses: Many parents are forced to invade their IRAs to help pay for a child's college expenses. Fortunately, distributions made before age 59½ do not trigger the penalty tax if the funds are used to pay for qualified education expenses. This includes tuition, books, supplies, etc.--even room and board--if your child is a full-time student.

Depending on your situation, you may qualify under one of these exceptions or a lesser-known "safe harbor" in the tax law. Obtain professional assistance with respect to your personal circumstances.

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