Penalty-Free IRA Distributions Before Age 59 1/2

Penalty-Free IRA Distributions Before Age 59 1⁄2

The substantially equal periodic payment exception permits you to tap assets earlier than intended.

Because IRA funds are meant to underwrite retirement, the federal government discourages you from taking IRA distributions before you reach age 59 1⁄2. Consequently, any taxable distributions you take from an IRA before reaching age 59 1⁄2 are generally subject to a 10% early distribution penalty tax. There are exceptions, however.

The Internal Revenue Service recognizes that individual investors should be allowed to take distributions before reaching age 59 1⁄2 without incurring an additional penalty tax under certain triggering events and circumstances. This document addresses the exceptions to the 10% early distribution penalty tax on IRA distributions. It also addresses the methodology behind calculating the payouts.

If you are under age 59 1⁄2 and wish to begin withdrawing from your IRA at least annually, you may be eligible to do so without incurring a 10% early distribution penalty tax. However, special rules govern how you determine the amount you must withdraw and how long you must continue taking distributions to avoid the 10% penalty tax.

If you are under age 59 1⁄2 and begin taking distributions under this exception,* you must continue taking such distributions until the later of the following dates:

  • five years from the date of the first payment, or
  • the date you reach age 59 1⁄2

If you do not continue taking substantially equal periodic payments until the later of the above dates, 10% early distribution penalty tax applies to each distribution you took under this penalty exception retroactively to the first distribution.

Contact your Wealth Advisor for more details.

Determining the amount

The IRS has provided three methods an IRA holder may use to calculate distributions that will automatically satisfy the substantially equal periodic payments exception. These three methods are briefly outlined below. You should consult with a competent tax advisor before beginning distributions under this penalty exception as the rules are technical and the tax consequences can be significant.

Method 1: You may determine the payments according to IRS rules for determining required minimum distributions for IRA holders over age 701⁄2. These payments may be based on the joint life expectancy of you and your beneficiary, on your single life expectancy or on the Uniform Life Expectancy Table established by the IRS.

Method 2: You may determine the payments by amortizing your IRA balance over either the joint life expectancy of you and your beneficiary or over your single life expectancy. The annual payment is determined once for the first distribution year and is the same for each succeeding year.

Method 3: You may determine the payments by dividing your IRA balance by an annuity factor. The annuity factor is the present value of an annuity of $1 per year beginning at your attained age in the first distribution year and continuing for life.

Consult your tax advisor

Under certain circumstances, an individual under 59 1⁄2 may take distributions from his or her IRA without incurring a 10% early distribution penalty tax. Distributions are not subject to the penalty tax if taken due to death or total disability of the IRA holder, or if taken under the exception discussed above. Before taking any distribution from your IRA, however, we strongly recommend that you consult your tax advisor.

There are other events/conditions under which you are permitted to withdraw IRA funds early (before 59 1⁄2) without incurring a penalty. They are:

  • Becoming totally disabled
  • Incurring certain deductible medical expenses
  • To purchase health insurance if unemployed
  • Certain qualified higher education expenses
  • First time home buying expenses capped at $10,000

*The penalty exception discussed herein applies to the 10 percent early distribution penalty tax that IRA holders must pay to the IRS. Consult your Hilliard Lyons Wealth Advisor regarding any penalties specific to your IRA investment.

J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA & SIPC. Hilliard Lyons does not offer tax or legal advice. Please consult your tax advisor or attorney before making any decision that may affect your tax or legal situation. ©2018 All rights reserved.

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J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA, & SIPC

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