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William Perez

Taking Early Distributions from an IRA

By September 22, 2008

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People may need to tap into their individual retirement account before turning age fifty-nine and a half. Withdrawing money before that age subjects the funds to an additional 10% tax. Withdrawing funds after that age, there's no additional tax penalty. This additional levy can be avoided under the following circumstances:
  • You had a "direct rollover" to your new retirement account,
  • You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days,
  • You were permanently or totally disabled,
  • You were unemployed and paid for health insurance premiums,
  • You paid for college expenses for yourself or a dependent,
  • You bought a house for the first time
  • You paid for medical expenses exceeding 7.5% of your adjusted gross income, or
  • The IRS levied your retirement account to pay off tax debts.
Questions about taking an early distribution from an IRA? Leave a comment below.
September 22, 2008 at 11:32 pm
(1) question from vicki says:

Dear Mr. Perez…

I would very much appreciate your help with an issue regarding my taking a withdrawal from my IRA.

I am not 59 ½ yrs of age, however I am disabled and the amount taken was used for a medical situation this year.

Am I right in that I do not have to pay the 10% IRS penalty but that I do have to include the full amount I had taken out as income?

The thing I am most worried about is that even though I am married, together we do not make more than $50,000, I would like to know if by using this distribution money and now having to add it to income, is this going to make part of my social security income taxable?

I hope I included enough information, if not, please let me know. I really need to get this situation resolved.

Thank you so very much…


September 22, 2008 at 11:43 pm
(2) taxes says:

Vicki, it doesn’t sound like this distribution will be subject to the additional 10% tax on early distributions. If you are permanently disabled, then there’s no age restriction on when the distributions can be made. If you aren’t permanently disabled, you can still avoid the 10% penalty if your medical expenses exceed 7.5% of your adjusted gross income. And you don’t need to itemize either to claim this exception. Just keep your medical bills along with your tax records.

The withdrawal will be taxable depending on the type of IRA you have. If it’s a traditional IRA, this will be taxable. And that means it will increase your taxable income, which could cause some of your Social Security to become taxable.

If this is a Roth IRA, any distribution made because you are disabled is not subject to tax (or the additional 10% penalty). This would not increase your taxable income, and so would not cause your Social Security benefits to become taxable. (See this section of Publication 590 for more details about Roths.)

September 24, 2008 at 11:14 am
(3) oliver says:

Mr Perez,

I currently own a traditional IRA. Iam ready to cash out ASAP before the age of 59 1/2. In addition to the 10% tax deduction, what will be the percentage I will pay from the amount withdrawn from this IRA? Another 20%? or 30%. I guess the amount withdrawn from my IRA is considered as an income, isn’t it?
In fact, I will not record any other incomes for this year (not working in 2008), so would it be interesting to cash out this year 2008 and then benefit with lower taxes for this year?

September 25, 2008 at 9:07 pm
(4) taxes says:

Oliver, what a great planning opportunity. The IRA withdrawal will be taxed as ordinary income, meaning it’s subject to the progressively higher income tax rates. Here’s a chart of the tax rates for 2008. To figure your tax, you’d factor in any deductions or tax credits you might be eligible for. At the very least you’ll have your standard deduction. Here’s the standard deduction amounts for 2008. You’ll also have your personal exemption (for yourself and any dependents).

So, assuming a simple tax situation, you’d figure the tax using the above information like this: (a) IRA distribution amount – (b) standard deduction – (c) personal exemptions = (d) taxable income. Take the amount for (d) and figure the tax using the tax rate schedule. Then for the 10% additional tax, see if you’d qualify for any of the exceptions. If not, take the amount for (a) and multiply by 10%. (A) and (D) added together will be your federal tax for this year.

There may also be state taxes to consider as well. You’ll need to find that information separately. What I would do (personally) is ask the IRA administrator to withhold the exact amount of tax I calculate. Otherwise they will withhold a flat 20%, which in my experience is usually too low to cover the taxes that might be owed.

Once you know this tax liability, you can go back and look for any deductions or credits that you might qualify for. Any extra tax breaks will only further reduce your tax liability. I’m not sure about your particular life situation, but things like school tuition, significant medical expenses, charity, mortgage interest and property tax would be the big ticket items to review.

Hope this helps,


September 29, 2008 at 11:32 am
(5) Oliver says:

Thx William. Informations were really helpful.

September 29, 2008 at 1:08 pm
(6) follow up question from vicki says:

My one other question is, when I took out my IRA money, I did not specify to the bank that I was disabled, so if the box does not have the proper code, is this going to be a big issue? Banks, especially internet banks are a little difficult to deal with.

September 29, 2008 at 7:11 pm
(7) taxes says:

You should first ask the bank to code the 1099-R form properly to reflect this is a distribution due to disability. If they don’t code it properly, then you can correct that on the tax return by filing Form 5329 (instructions) and indicate that the distribution is due to disability on Line 3 using code 03.

September 30, 2008 at 11:34 pm
(8) mel says:

Is it wise to take out money from Your IRA when your disabled? With the market in tumoil and have lost money that will take years to recoup, esp., since the IRS say’s you cannot add money into it if you don’t have “earned income”. Please help, I would love to buy into the low market into my IRA ( roth and traditional).

October 1, 2008 at 8:54 am
(9) debbie says:

Is there a max dollar amount for early distribution for higher education like 1st time homebuyer is $10,000..?

October 9, 2008 at 6:40 pm
(10) David P. says:

William: My wife is a teacher and has a 403B account. Can she Roll Over her money to an IRA while she’s still employed and making contributions to her 403B? She’s over 59 1/2. Thanks for your help.

October 10, 2008 at 1:13 pm
(11) Amy says:

When you withdraw money before age 59 1/2, is the additional income you claim the amount minus the 10% penalty for eary withdrawal and the 10% additional tax penalty (amount withdrawn 50,000 but actually 40,0000 after withdrawal and tax penalty)? Thank you.

October 23, 2008 at 1:59 pm
(12) brian says:

Can you be disabled permanently and legally, yet sitll work and take an early distribution without penalty?

October 25, 2008 at 3:58 pm
(13) Edwin says:

Hi William:
I hope you can help me with this issue. In 2006 I cashed out my IRA to pay for a loan that I obtained to pay the closing costs for the purchase of my first house. I’m embarrased to ask this question – but is there anyway to prove to the IRS that this money was used to paid my closing costs? I purchased the house on Dec, 2005 and the withdrawal was made on June 2006.

November 4, 2008 at 9:29 pm
(14) William Perez says:

Mel, generally, I don’t advise withdrawing from an IRA unless you really need to. Once that money is withdrawn from an IRA, it generally cannot be re-deposited, so you really need to be sure that you need that money outside of a retirement plan. If you plan to invest or save for ahwile, it will probably be better off inside the IRA. I also posted some additional considerations to keep in mind when thinking about cashing out an IRA.

November 4, 2008 at 9:31 pm
(15) William Perez says:

Debbie, there’s no particular dollar limit for education expenses like there is for the purchase of a home. Just be sure to keep invoices for tuition handy in case the IRS has any questions.

November 4, 2008 at 9:33 pm
(16) William Perez says:

David P., unfortunately, no. Your wife cannot rollover her 403(b) money to an IRA while she’s still employed. However, she could rollover IRA money to her 403(b). I wish they would fix this law, and allow savers to pick the best fund for their retirement instead of being stuck with the funds picked by the group plan.

November 4, 2008 at 9:35 pm
(17) William Perez says:

Amy, no the entire amount of the money you take out (called the gross distribution) is subject to both the tax and to the 10% penalty. So the $50,000 withdrawal is subject to tax plus an additional penalty of $5,000 (10%).

November 4, 2008 at 9:41 pm
(18) William Perez says:

Brian, generally no. The IRS wants to proof that the taxpayer “cannot do any substantial gainful activity because of your physical or mental condition” according to the explanation of “disabled” in Publication 590. However, for any particular year, the IRS might not raise any questions. For example, did the work occur before becoming disabled, or perhaps much later in the year. If the person was working simultaneous to taking the distribution, perhaps it was used to pay for significant medical expenses?

November 4, 2008 at 9:59 pm
(19) William Perez says:

Edwin, Is the IRS asking for proof? Or is this more of a general question? If the IRS isn’t asking any questions, the simple answer is to gather your escrow documents showing all the closing costs you paid. The relevant law here is Internal Revenue Code section 72(t)(8), which specifies that the IRA funds withdrawn must be used “before the close of the 120th day after” the withdrawal was made and used to pay for costs related to the purchase of a main home for a first-time homebuyer. Since the closing costs were paid in December 2005 and the distribution was made June 2006, the closing costs were paid before the 120-day period elapsed. Or perhaps I’m taking an overly generous reading of the law here? I don’t see any regulations or case rulings that weighs in on what happens when a home is purchased before the IRA distribution is made.

November 18, 2008 at 2:12 pm
(20) Brian says:

Bill -

I am taking an early withdrawal from my SEP to pay for higher education expenses for my daughter. In order to avoid the additional 10% penalty, may I utilize earlier education expenses from 2007 or 2006 to match against the withdrawal or am I only able to utlize those education expenses incurred in 2008?

Thank you.

December 1, 2008 at 12:59 pm
(21) BEN says:

I’ve been off work since July of this year and am now facing major surgery that will keep me from working for a minimum of 12 weeks. If I withdraw funds from my IRA for medicals, would that money be subject to the 10% penalty for early withdrawal?

December 7, 2008 at 12:34 pm
(22) Patricia says:

Mr. Perez,
How do I find out if Minnesota will tax my early IRA withdrawal?

December 16, 2008 at 7:45 pm
(23) taxes says:

Patricia, it does not appear that MN imposes a penalty on early withdrawals from an IRA. However, the state does allow people to pay a capital gains tax on a lump sum distribution in certain circumstances. You may want to confirm this with a local accountant in Minnesota.

December 16, 2008 at 8:04 pm
(24) taxes says:

Ben, you can take a withdrawal from your IRA penalty-free, but remember that the withdrawal will still be included as part of your taxable income. The amount that can be withdrawn without penalty will be the amount of medical expenses that exceeds 7.5% of your adjusted gross income. Now, taking a distribution from an IRA increases your AGI, and so this will increase the 7.5% threshold as well. This makes the formula for finding your optimal IRA withdrawal a bit circular. Fortunately I remember how to do this math. The equation for calculating the penalty-free IRA withdrawal for medical expenses would be as follows:

A = [B - (0.075 x C)] / 1.075

Where “A” is the penalty free amount of the IRA distribution,

“B” is your total medical expenses for the year, and

“C” is your total other income (not including the IRA) minus any adjustments to income.

Once you plug in for B and C, you can solve for A.

December 22, 2008 at 9:15 pm
(25) Jim says:

I am a Pastor who was between positions when I took some of my 403 (b) to place it on the down payment of a house in a new city and kept some to help us with bills while unemployed. In addition to Income Taxes, will I also have to pay the self Emplyed Social Security Payments on the money as if it was earned income?

December 23, 2008 at 12:22 am
(26) taxes says:

Pastor Jim, no you won’t have to pay the self-employment tax on this distribution from the 403(b) plan. Those distributions are treated as ordinary income and are not subject to the self-employment or payroll taxes.

The other thing to pay attention to is the 10% penalty on early distributions from a 403(b) plan. So if you were under age 55 when you took the withdrawal, you’ll be subject to the 10% penalty unless an exception applies. The two main exceptions that you’d especially want to look at is for unreimbursed medical expenses or if you were disabled. Documenting such things can help reduce your penalty (if that applies).

If you took this distribution within the last two months, it may be possible to put this money back into the plan. You have 60 days from the date of withdrawal to roll that money over, either to another plan or back to the same plan administrator. If you’re still within this 60-day period, it might be worth it to see if you can get a home loan for the amount of the distribution so you can put it back into your retirement account.

December 27, 2008 at 5:51 pm
(27) Jim says:

Mr. Perez,
Thank you so much for your help. I was 56 and without a job so I don’t think the 10% penalty applies but I am still a little unclear when I read the instructions and forms. It looks like the lump sum withdrawal must be included in my income on Form 1040 therefore it would have to be included on line 2 of Form 1040 SSE…is that correct?
Thanks again.

December 28, 2008 at 1:20 am
(28) jim says:

That’s 1040 Schedule SE

December 29, 2008 at 3:35 pm
(29) Joanie says:

If you obtained a 401k account through a divorce on a qualified domestic relations court order, it is my understanding the 10% penalty doesn’t apply if you withdraw the money early before 59 and 1/2. Is there any other penalty? Is this considered additional income and taxed as income? Basically what would I owe for all taxe rates and penalties in this situation?

December 30, 2008 at 7:09 pm
(30) taxes says:

Jim, no the withdrawal from the 403(b) does not have to be included on Schedule SE. The self-employment tax is only paid once, when the income is earned (even if the income is set aside in a retirement account). Because the SE tax has already been paid, you won’t need to pay it again.

December 30, 2008 at 7:11 pm
(31) taxes says:

Joanie, when a 401(k) account is split as the result of divorce, your portion of the money can go into a rollover IRA set up in your own name. That way the money won’t be taxed until you withdraw the funds. Otherwise, the distribution will be subject to the income tax. But it won’t be subject to the additional 10% penalty.

December 31, 2008 at 10:48 pm
(32) DebbieK says:

Hello William,

I apologize if this is redundant, but after reviewing all the comments it appears that no one specifically asked this question.

I need to tap into my IRA to pay for bills. Is there a way to get out of paying the 10% tax (i.e. repaying the money by April 15th)? Also, will there be a penalty in addition to the tax?

Thank you very much.

January 1, 2009 at 10:11 am
(33) Student says:

I currently have a 403(b), I am leaving my job (yesterday was my last day) and starting a new job this month while also attending graduate school full time. I do not have any savings money and I was wondering if I can use my money in my 403(b) for school tuition? If so is there a penalty? Does it have to be rolled over to an IRA first?

January 1, 2009 at 4:39 pm
(34) Jim says:

I hope I am not being a pain but want to be certain I am doing this correctly. The 403(b) contributions were placed in my retirement account by my church and I don’t believe I paid any tax on them at that time since I was never in control of that money. Do I have to include that on my 1040-SE form?

January 4, 2009 at 5:21 pm
(35) Lisa says:

My IRA CD holder did not make the Minimum Required Distribution (MRD) in 2008 as they were instructed when I opened the CD, i.e. ($2,316). Will I now be penalized by 50% for their mistake? I did take out the current monthly interest on the current balance, which should have been reduced since August 2008, the date set for the MRD What are my options..

January 4, 2009 at 8:27 pm
(36) Lynn says:

I have a huge amount of credit card debt and I am thinking of cashing in some of my retirement. I have no other way out and the stress is getting to me. If I don’t eliminate the stress, I may not be around for retirement anyhow. Part of the reason I have the credit card debt is due to giving my son money for his college tuition. Although the debt has accumulated over a period of years, if I can prove that I paid money for the tuition, over the amount that I am going to take out of my IRA, can I avoid the 10%? My situation is long and involved and I know that everyone tells you to not touch your retirement but I honestly think in a year, I will be in a better financial situation and I can start contributing 20% to my retirement. I am in a 20 to 28% tax bracket and right now I am not contributing anything to my retirement. Yes, I am embarrassed by all of this.

January 5, 2009 at 11:26 pm
(37) Lisa says:

Please ignore my post No. 35. I was misinformed regarding my 2008 disbursement. They actually did disburse the MRD in September, but I had not received my 2008 account statement yet. I went to their branch in person and they were very helpful in showing me the dates and numbers

January 13, 2009 at 8:16 pm
(38) April says:

I am divorced,and my attorney is drawing up a QDRO in order for me to receive my half of my spouse’s 401k. However, I have some questions. I would like to take out only a portion of the amount, and roll the rest over into an IRA. I am told that I will not receive the 10% early withdrawal penalty, as long as I roll the money into an IRA. Is that true? Also, what will I be taxed on. Say I get $40,000, but I want to take $20,000 out and roll the other $20,000 into an IRA. Thanks,

January 15, 2009 at 1:57 am
(39) Michelle says:


My job was outsourced at Chrysler Financial this past December. I worked for Chrysler for over 7 years. Eventhough i’m no where near 50, I want to know if I can withdrawn my pension. I’m not looking to roll it over. I just want to withdraw the money, penalty or no penalty, I still want to withdraw. Please let me know if I can do this. Chrysler keep telling me I have to wait until i’m retired.

January 15, 2009 at 9:42 pm
(40) taxes says:

Michelle, pensions are individually crafted by each employer. So unlike 401(k) and other types of retirement plans, there’s no one set of rules that we can reference to say what is allowed or not. Basically, if the Chrysler pension plan specifies that you must work so many years or reach a certain age before becoming eligible, then those are the criteria you’re going to have to go by.

January 16, 2009 at 5:31 pm
(41) Michelle says:

What are the penalties for cashing out a Roth IRA? I only have a small one but am unable to work as I have gone back to school full time and needs the funds immediately. When would the taxes on those have to be paid and what type of penalty is there. Thanks for any answers

January 19, 2009 at 8:17 pm
(42) taxes says:

Michelle, Roth IRAs are taxed only on the amount in excess of the amount you originally contributed. For example, let’s say your have a balance of $10,000 that you withdraw, and you originally contributed $8,000. You’ll be taxed only on the $2,000 in earnings, plus any penalty. However, any withdrawal used to pay for college tuition for yourself will not be subject to the additional 10% penalty.

January 19, 2009 at 8:21 pm
(43) taxes says:

April, the amount distributed from your ex-spouse’s 401(k) will be taxable income to you, but not subject to the additional 10% penalty. Any amount rolled over to an IRA or to another 401(k) account will not be included in your taxable income for the year. (See the QDRO section of Publication 504 for these details.) Thus in the transaction you propose, $20k will be taxable income to you.

January 19, 2009 at 8:27 pm
(44) taxes says:

Lynn, you can take advantage of the exception to the additional 10% tax only for college expenses incurred in the same year as the distribution from the IRA. There was a tax court case similar to the scenario you present, where the taxpayer cashed out his IRA to pay off credit cards that were used to finance a college education. The court determined that the 10% penalty still applied. (T.C. Memo. 2005-162.)

January 19, 2009 at 8:30 pm
(45) taxes says:

DebbieK, the only way to avoid taxation of the IRA distribution is to repay the money within 60 days. Otherwise this will be considered taxable income to you, plus the 10% penalty if you are under age 59.5.

January 19, 2009 at 8:33 pm
(46) taxes says:

Student, if you have a new job, I would rollover the money into a new 403(b) or 401(k), and then subsequently take out a loan against the funds for your education. This will preserve the tax deferral on the savings. If you are definitely going to withdraw the funds for school, I would first roll it over to an IRA in a direct rollover, and then take distributions from the IRA. That’s because IRA distributions are included in your taxable income, but you’ll avoid the 10% penalty.

January 20, 2009 at 2:21 pm
(47) Jaime says:

I have been living in what is my first home for the past 5 years.
If I were to take out part or all of my IRA to apply only towards payment of my first home mortgage, would it still not be subject to the 10% penalty?
Thank you!

January 20, 2009 at 2:40 pm
(48) William Perez says:

Jaime, distributions from an IRA can avoid the additional 10% tax if the proceeds are used to purchase your first home. Proceeds must be used to pay for the home purchase within 120 days of the withdrawal from the IRA. Paying a mortgage doesn’t count as home acquisition costs. So if you withdraw the funds now, you’ll be stuck with the 10% penalty.

A better solution would be to rollover your IRA into a 401(k) plan, and then take a loan against your 401(k). This will preserve the tax-deferral on the funds and avoid both the income tax and the 10% penalty as long as the loan is repaid.

January 25, 2009 at 11:49 am
(49) joni says:

i need help. i am a 58 year old widow and unemployednow for 6 mos. i am still paying college loans for my son, and paying premiums for my own health insurance. in order to pay my mortgage payment so i don’t lose my home, i have had to tap into my retirement fund. i know i can deduct the ins, but i am truly in a hardship situation that i feel is at least as worthy as bailing out a ceo with no conscience. help!

January 26, 2009 at 12:20 pm
(50) Karin says:

Hi. Thanks for your help. I took an IRA distribution earlier this year because I knew that my husband was going to have his job eliminated sometime during the year. He worked for DHL which is leaving the country. I used it to pay a variety of bills including credit cards so that we could live on one income. At the time I was a consultant without a full-time job and 58 years old. Do any exceptions apply to me? Thanks for your help.

January 26, 2009 at 12:37 pm
(51) Michelle Garrigan says:

Can I take a distribution from my IRA without penalty to purchase an investment property? I own my owm home currently

January 27, 2009 at 12:46 pm
(52) Karin says:

As a follow-up to my previous question, I understand that I need to pay taxes on the IRA withdrawal, but it seems like in this economy the 10% penalty is a little stiff. Thanks!

January 28, 2009 at 1:24 pm
(53) Robert C says:

My sister took 4000.00 out of her IRA to pay taxes on a lump sum she took out the prior year. Does she have to pay tax on this? she is and was disable when she did this.

January 29, 2009 at 11:44 am
(54) lili says:

has the treasury or IRS done anything to reduce penalty or reduce taxes on an early withdrawal from IRA’s. I also took money from my IRA to pay bills so we would NOT go to foreclosure or bad credit with our creditors

February 1, 2009 at 11:00 am
(55) Jim says:

Jim, age 30, made Roth IRA contributions of $4,000 between 2005 and 2008. In 2009, Jim’s Roth IRA has a balance of $3,500 (he lost money). Jim decides to close his Roth IRA in a non-qualified distribution that year. Since the distribution is non-qualified, will owe taxes on his Roth (losing balance) of $500? Understanding that since the distribution is non-qualified, Jim would have owed taxes on any earnings above $4,000, and would have had to pay tax on that (earned) amount at his marginal tax rate. In addition, since the distribution took place before Jim reached age 59 1/2, and since Jim did not meet any of the exceptions, Jim would have bee assessed a 10% early withdrawal penalty on any (over $4,000) earnings. But, again, what if there was no earnings and he actually “withdrew” less money than he contributed over the lifetime of the fund (with any plus or minus interest earned over the ifetime of the fund)?

February 8, 2009 at 6:11 pm
(56) Dottie says:

Mr. Perez,
I hope you can help me with this situation. I left a previous employer where I had an IRA. When I left that company, I cashed out all money in my IRA. I am 56 years old and not disabled. Will I still have to pay the 10% penalty for early distribution?

February 9, 2009 at 9:18 pm
(57) MarkM says:

Understand that taking money from IRA is taxable and has the 10% penalty. Is there any tax deduction that you can take if taking the money results in a capital loss on a cost basis?

February 11, 2009 at 12:43 pm
(58) Rene Perez Jr says:

Good Morning this is more of a question than a comment. Is there a special early distribution exception rule for seperated or divorce individuals? I don’t see it on your list of choices. But, I think there is one.!

February 15, 2009 at 2:06 pm
(59) Jonathan says:

Hello Mr. Perez,

I haven’t seen exactly this answer posted so I thought I’d post and ask. To make a long story short I need to deduct about $10,000 from my IRA. This is an early withdrawal, subject to the penalty. I gross $50,000 per year. I am trying to determine what percentage to deduct to help with taxes in advance so I am not left with a huge tax bill next year. I would rather err on the side of setting aside too much. I was guessing about 30% but wasn’t sure if that was enough. I live in Florida and will not have to pay state/local taxes. Any thoughts? Your help is appreciated! Thank you. ~Jonathan

February 17, 2009 at 9:42 am
(60) Terri says:

I had medical expenses last year exceeding 7.5% of AGI. I was not aware that I could have taken an early distribution from our IRA to cover them. I paid for them from an equity line. I already filed 2008 tax return and itemized. I wondered if I could still take the distribution up to April 15th or did I need to do it before Dec.31st? I know I would have to file amended (of course). Do they allow you to take it after the year ends?

February 21, 2009 at 11:00 am
(61) adriene says:

I took out a large sum to pay for two children higher education as I could not get a loan. I am now doing my taxes and I see where I won’t get the additional 10% early withdrawal penalty but It put my income over the amount where I don’t qualify for any credits or deductions of the tuitions. It seems it would go on earned income as I used my entire ira to make sure they can finish school. My distribution was more than my income. Any thoughts or help as to how I can deduct something. I had over 50k in higher education. I only earn a68k a year with four children by myself.

February 21, 2009 at 7:34 pm
(62) William Perez says:

Joni, Sorry to hear about your financial hardships. But presently there’s only exceptions for health insurance and medical expenses and current college expenses. Student loans and mortgage payments won’t qualify for the exceptions. Sorry.

February 21, 2009 at 7:42 pm
(63) taxes says:

Karin, sorry to hear about your husband being laid off. There are exceptions to the early distribution penalty for health insurance premiums and medical expenses. Those are the two exceptions that I think might be most relevant to your situation.

February 21, 2009 at 7:48 pm
(64) taxes says:

Robert C., yes, normally, distributions used to pay taxes are still taxable and subject to the 10% penalty unless the taxpayer is over 59.5 years old. However if she’s permanently disabled, she can avoid the 10% penalty, and possibly qualify for the tax credit for the disabled.

February 21, 2009 at 7:50 pm
(65) taxes says:

Lili, the government has not done anything to provide any tax relief for people who’ve needed to draw down their retirement savings due to financial hardship situations. I wish they would! Could be a good suggestion to send to your Congress person.

February 21, 2009 at 7:52 pm
(66) taxes says:

Jim, see my article on reporting IRA Losses. Basically, this should not trigger any taxes, and you could possibly take the $500 loss as a miscellaneous deduction.

February 21, 2009 at 8:01 pm
(67) taxes says:

Dottie, your situation will depend on exactly what type of retirement plan you had with your former employer. If you had a 401k plan, there’s no penalty since you are over 55 years old. If you had a SEP-IRA, then the same rules as other IRAs apply, and the distribution is subject to the 10% penalty if withdrawn before you reach 59.5 years old. If you had a SIMPLE-IRA, the penalty may be 25% if you began participating in the plan less than 2 years ago.

February 21, 2009 at 8:03 pm
(68) taxes says:

Mark M., see my article on Claiming IRA Losses. Depending on the type of IRA and whether there’s basis, the distribution could potentially avoid tax and penalty, and you might be able to claim a loss deduction. However the math works out differently for different types of IRAs.

February 21, 2009 at 8:06 pm
(69) taxes says:

Rene, there are no special rules that apply to separated and divorced individuals.

February 21, 2009 at 8:09 pm
(70) taxes says:

Jonathon, you’ll need to know your marginal tax bracket. Here’s a list of the 2009 tax rates by filing status. Assuming you’re single, I would say you’ll be in the 25% tax bracket. So I’d set aside 35% in tax withholding (25% + 10% + 0% for state).

February 21, 2009 at 8:14 pm
(71) taxes says:

Terri, the distribution and the medical expenses would have to occur in the same year. Since the distribution would occur this year (’09), and the medical expenses were incurred last year (’08), the IRS would disallow the penalty waiver. Sorry :-(

February 21, 2009 at 8:17 pm
(72) taxes says:

Adriene, you’re getting caught with the phase-out limitations based on income for the education credits and deductions. Basically there’s no way around this. As a general rule, it rarely makes sense to use retirement funds to pay for college. It will be better for you, financially and taxwise, if the kids get student loans or grants or work study, and allow you to keep your savings for retirement.

February 23, 2009 at 4:14 pm
(73) Suzanne says:

Do student loan payments qualify for education expenses under the hardship requirements for early withdrawal under the 403(b) regs? I don’t think they do but I cannot find an interpretation of the reg. Any help would be greatly appreciated!

February 24, 2009 at 11:02 am
(74) Tom says:

I cashed out my traditional IRA this year. A friend told me that I have 3 years to claim it on my tax return. Is that true?

March 1, 2009 at 10:47 am
(75) Diane says:

Hello William Thank you for sharing your expertise! My husband was laid off from two jobs in 2008. He just found employment at below minumum wage as waitstaff and will have a W2 from that job. I have a full and a part time job. The full time job provides health ins. We have a daughter in college, one grad from college May 2009 and the youngest is a high school junior. I will be 59 Sept “09. My husband will be 59 March “11. His unemployment will end Dec “09. Our FICO score is 780. We are trying to remortgage despite the loss of 66% of our income. Our home’s LTV ratio is 45%. Besides eliminating any expenses we can, is there anything else we should consider if he continues to be unemployed past Dec “09? We have about $250K remaining in IRA’s. I am afraid that my financial knowledge is not up to the challenge we are facing. If my husband does not find a job earning close to his previous income before his unemployment ends in Dec “09, could we withdraw from the IRA money in Feb 2010 when I am 59.5 without the 10% penalty? We are paying a portion of our middle daughter’s college expenses in cash and alternative loans. We are current on all our bills at the present, but I want to have a worst case stategy to avoid foreclosure and a lower credit score if our income does not rise by early 2010. Thank you so much for your answer!

March 4, 2009 at 3:58 pm
(76) carl says:

i am 77 and i have an IRA CD coming due soon..what are the tax implications if I w/d the entire balance?

March 11, 2009 at 10:32 am
(77) Trish says:

Hello. I need to know if there is a way to avoid the 10% penalty for early withdrawl from an IRA Savings Account. I need to pay tuition and college expenses with that money.
I am employed part time, and will be returning to college in June at the age of 45.
I will be paying for individual health insurance as well.
Thank you, Trish

March 12, 2009 at 10:52 am
(78) Erin says:

I took money out of an IRA last year and the bank told me I had 60 days to put the money back, which I did. Is there something I need to file with my taxes to prove that I put it back?

March 17, 2009 at 6:30 pm
(79) Priscilla says:

I had to take an early withdrawl from my 401 k in 2007 and it was with penalty plus taxes then on question 30 of form 1040 this year I notice it says in the credit sections penalty on early withdrawl so is that asking me to enter the penalty i paid in 2007 or what is it asking

March 22, 2009 at 6:52 pm
(80) Nicole says:

I’m using a tax software for my taxes. I entered my 1099R for the withdrawal of funds I used towards my new home (first-time home buyer). After I entered all of the information, it looks as though the “income” is being taxed. Do I not enter the information and just keep documentation of the transactions? (Showing the money was used in the purchase?) I’m not following exactly what I need to do given I qualify to not have it taxed… Thanx in advanced!

March 23, 2009 at 6:40 pm
(81) LAURA says:

Dear Mr. Perez,

I would appreciate your help with an issue regarding three withdrawals/distributions from my 401K.

I am under age 59 ½, but I am disabled and also paying well above 7.5 times my adjusted gross income for medical needs.

On my tax software, it asks you where the distribution is from? I received ONE 1099R that states the amount is total distribution and has zero as taxable amount and has a “G” as distribution code. The other TWO 1099-R show the amount taken as taxable and the distribution code as 1. Do these three amounts go under disability benefits? Why are the codes different. All funds were used for medical.

Thank you so much,

March 26, 2009 at 5:16 pm
(82) Mike says:

Mr. Perez,
I am about to receive a lump sum payment in lieu of a pension of about $14,100 ($11,000 after taxes).
Can I put it in an IRA and withdraw it at 55 (or 56, or 57) without a penalty? I’ve heard you can withdraw it as long as its distributed in equal monthly amounts over five years.
Thanks for your response

April 10, 2009 at 6:09 pm
(83) elyzabeth says:

dear mr perez
i know i am under the gun here re: tax time…
however i am confused about my ira…
last year i took a complete distribution of my ira…to pay off my credit card account…and it had been doing nothing for many years.
i am not money savvy ..i did not invest it in anything else.
my income for 2008 is $2583….
i am would like to know if i must file this withdrawal…and if i will have to pay a fee for early withdraw…and can i pay that tax over a period of payments as i have no savings ????
many questions…hope you can help.
thank you

April 14, 2009 at 7:12 pm
(84) tom says:

unemployed from 10/20/07. Exhausted my 401k in 2008. Separated in 08, paying child support,left with enormous credit card debit, living expenses. But had no medical expenses. Mental depression to the max. Is there a reason to continue?

April 23, 2009 at 3:02 pm
(85) Alastair says:

Hi William,

Thanks for this article, and for answering everyone’s questions.

Suppose I were to take an early distribution now, for the actual purpose of paying off credit card debts, but then attended school later – in the Fall? Would I still qualify for this exemption from the Early Distribution Tax, or would it be considered something sneaky by the IRS? In the latter case, do you think it would come off, or fall under scrutiny?

Does tuition paid at foreign universities qualify? Where can I obtain a list of recognized educational institutions, or a legal description of what is considered one?

Lastly, when is the Early Distribution Tax paid? — at the moment of distribution, or with other income taxes by April of the following year?

Thanks very much!

April 24, 2009 at 4:06 pm
(86) Liz Easterly says:

I am considering taking a large sum about 25000.00 outof my traditional IRA. I am 55 and know that I have to pay a penalty and taxes. Could you please give me a general idea of what percent of taxes to withold. I figure 30 percent should be enough but I live in New York State and don’t want to be short for either Fed or State.
Thank you.

April 29, 2009 at 1:32 am
(87) Margaret says:

Husband 65, soon to be 66. Has IRA dated 6-06, wants to withdraw because of loss, was $30K is $26K as of this month. Would rather cash in than lose. What is penality if any? Or is it only the due taxes and then the monies withdrawn to be claimed as income next year for IRS? Thank you for your response.

July 14, 2009 at 8:38 am
(88) Sarah says:

I am putting myself though school and working part time. When I changed jobs in 2006 I didn’t roll over my 401k from the old job. My 401k from the old job has since become an IRA. I would like to take the money out to help pay for classes. How do I go about avoiding the additional levy? Thank you.

July 14, 2009 at 3:09 pm
(89) Lindsey says:

I am leaving my current job to go back to graduate school full time for 3 years. During this time I will not be working. My questions are: What are my options for my 403b? Can I leave it in its current place with my soon-to-be former employer even though I will no longer be making payments? Or do I have to move it? Can I even roll it over if I won’t be making payments or do I just have to take out all the funds?

September 4, 2009 at 11:00 am
(90) Aaron says:

Mr. Perez,
I have to take an early withdrawl from my IRA to cover expenses and pay off debt that I can’t handle anymore. All other assets have been sold off and this is my last asset to save me from ruined credit and keep my afloat for the future. I have $120,000 of which $27,000 are non-deducted contributions. While I understand I will have to pay the 10% penalty, I have losses in the account. Does that factor at all into the distribution or the entire distribution less the non-deductible contributions are considered income? Please help me to understand.

September 23, 2009 at 1:59 pm
(91) Diane says:

My husband because withdrawing from his 401K plan at 55 because he left his job. This was 2 years ago. We would like to make a lump sum withdrawal to put a roof on our house and well as a few other repairs. We were told we would have to pay the 10% penalty on the total amount he has withdrawn over the past two years as well and the approximately $20,000 we would like to withdraw now. Is this correct?

October 18, 2009 at 7:25 pm
(92) Lynn says:

When my husband died 14 years ago, I rolled over his traditional IRA account into mine – we both had seperate IRA accounts. I am 57 and lost my job last year – I would be fine, however if I did not have a mortgage payment and would like to withdraw emough money over the next 2 years (to minimize taxes) to pay off the balance on my house. I do not want to wait – I seem to be getting farther and farther behind and cannot refinance as I have no income to report. My question is: Since the IRA money left to me by my husband would not have been subject to the 10% penalty when he died, is it subject to that penalty if I withdraw it 14 years later – after rolling it into my IRA account?
I would really like to start paying it down by the end of this year, that way the money I draw out this year will not be in a high tax bracket.

October 26, 2009 at 3:49 pm
(93) christine pageau says:

My 20 year old daughter is away at college and has developed severe headaches and vertigo. She has gone to a GP twice and they referred her to a neurologist who requests an MRI. We have no insurance, my income is 32k and we are both full time students. Can I cash in my IRA 16k without a penalty to pay for the medical and school costs.

October 30, 2009 at 11:21 am
(94) Magenta says:

i am buying a coop. i took 10k out of my traditional IRA toward buying it. as you know, coop boards want to see a lot of cash in the bank. i did not need the 10k to close. can i put the 10k back into my traditional IRA and not report it as income for my taxes?

December 16, 2009 at 12:24 pm
(95) Denise Dechene says:

Hello, I have had to resign my job to take care of my disabled husband. In order to do that I rolled over my pension into a IRA money market and going to have it distributed into my checking account monthly to pay bills, similar as me getting a paycheck. My question is this, I’m I still going to have to pay the extra 10% penalty?

January 7, 2010 at 11:29 am
(96) Sue says:

Question, my husband and I incurred 11,000 in out of pocket medical expenses, our AGI for 2009 will be around 76,000. Can we withdraw $4000 today from my IRA, deposit it into our HSA and pay off what we owe without incurring the 10% penalty or having to pay federal taxes on the 4,000?

2nd question. Can I withdraw $6,000 to pay my son’s college tuition, room & board without the 10% penalty. I am 48 years old.
Thanks for your help.

January 24, 2010 at 5:08 pm
(97) marcie says:

Mr Perez-
I have 11,618.79 in my IRA. 2009 was not agood year for me as for a lot of people,losing my job & doing something I have never done before using credit cards to live. I have since found another job, but now the credit card companies are jacking up the interest rates. Paying the credit cards is leaving me with nothing to live on,not paying them ruins my credit – so bankruptsy or pull out ira & pay them off. what will I end up owing Uncle Sam if I pull this out?

January 25, 2010 at 3:00 pm
(98) William Perez says:

Worst case scenario: tax on the amount withdrawn plus an extra 10% tax on the amount withdrawn, plus any state tax and state penalties.

January 31, 2010 at 8:44 pm
(99) Charles says:

I have an opportunity to pay off an 8%, 5 year business loan at a 22% discount. How can I calculate what the cost of early withdrawal penalty and tax would be from an IRA distribution? I want find out if it will be worth paying the penalty.

February 15, 2010 at 1:11 pm
(100) Rob says:

I am a 49 y.o. male with a rollover IRA. I am a stay at home dad and have not been employed for the last 3 years. If i liquidate my IRA now what would the financial implications be? Would i still have to pay taxes and early withdrawl penalties even though i have no income of my own. My wife makes $90k so that puts us in 28% tax bracket, so would i be liable since we file jointly?

March 15, 2010 at 2:43 pm
(101) raphael says:

i retired from postal service in 8/2008. took tsp to money manager and invested in stock market,lost 30,000.00. told him to transfer to the credit union, in traditional ira,100,000.00, that was in 10/2009. now i would like some play money. will i have to pay any penalty to withdraw 10,000.00 or so? im 57 years old. thank you

March 24, 2010 at 8:05 pm
(102) Linda says:

My husband is 64 and drawing social security. I am under 59 1/2 and unemployed and had to draw from my IRA to pay our living expenses. My question is on our health insurance premiums. My husband’s social security was only 21% of our income – the IRA early withdrawal was 79%. Our health insurance premiums are not broken out by individuals. To escape the early w/d 10% penalty do I claim 79% against the IRA early withdrawal or what percentage do I claim. TIA.

April 5, 2010 at 11:35 pm
(103) sarah says:

I withdrew from my roth ira to use towards my son’s school loan. I placed the money into my bank account to pay the loan monthly. I would like to know if I am still responsible for paying taxes?

April 9, 2010 at 8:03 pm
(104) Edna says:

I am 57 yrs old. I w/d from my IRA this past year.
I have no earned income this past year. I get a check for DIC VA check( because my husband died from a service connected condition) which is not taxable. I w/d to pay my
real estate taxes on my home and other bills. I did my taxes online, but have not filed yet. I will have to w/d more money from my IRA to pay the 564.00 owed. Will owe this if I have no other earned income?

April 12, 2010 at 6:09 pm
(105) Jim says:

I rolledover my IRA during 2009 from one financial institution to another. A portion of my IRA
included funds that were already taxed (post tax).
I was informed that I could take this post tax portion without incurring any tax penality or owning any tax on theses fund, which I did.
How do I account for this transaction on my tax return?

April 13, 2010 at 11:36 pm
(106) William Perez says:

After rolling money over, you cannot touch those funds for one year (else this could make the first distribution fully taxable). Also, the post tax portion might still be subject to the early withdrawal penalty of 10% if you are under age 59.5 years old.

April 14, 2010 at 10:44 am
(107) Don V says:

Mr. Perez,
I have an inherited IRA with about $2000 in it which I received when my mother died about 8 years ago. Since she was taking the RMD from this IRA when she was alive (age 78), I had to continue getting the RMD (I am now 48). The RMD has been confusing for every investment firm which has managed the money and I would like to withdraw all of the money from this IRA. Would I still be subject to the 10% penalty? I know there was a window to roll inherited funds over into another IRA, but I believe that time has long passed. Any help is appreciated! (I have gotten a lot of varying advice from different professionals on this subject.) I also have a 401k through my work and my own IRA. This extra IRA is just confusing.

April 21, 2010 at 3:03 pm
(108) William Perez says:

Don V, Your required minimum distribution is based largely on your age. You can cash the IRA out if you want, without any early penalties, since this is a distribution from an inherited IRA. For the RMD rules, see this section of Pub 590.

May 5, 2010 at 6:14 pm
(109) mark says:

I am retiring next year at age 57 am I subject to early withdrawl penalties from my 401k?

June 27, 2010 at 2:19 pm
(110) kimberly says:

I worked at Lowes home center from 1990 to 2005 and cause of several surgeries i had to retire and in 2005 i started receiving social security disability paymens for the rest of my life i will not be able to ever work again.i rolled my stocks over into an account with Merrill Lynch i believe it is an IRA account.i was told i could not get a hardship withdrawl on my money till i am 62 but i need some of it now cause im disabled and will be going through a divorce and now i live with my dad cause i cant afford to move out on my own and i have health conditions that i am needing some money for but they will not allow me to do anything with my money.please assist me with these issues if you can cause i need the help.one more thing i am not getting any support from my husband he has the house,the cars,the trucks,the boats and he owns his own business.weve been married for 11 years and i need all the help i can get.thank you

July 26, 2010 at 2:05 pm
(111) Matt says:

Mr. Perez,

I need to withdrawal all $15,000 from my 401(k) due to a financial hardship. I’m 43 years old. What’s the process for requesting an exception to the early withdrawal penalty? Must I pay the penalty now in order to get the funds, and then request the exception?


October 5, 2010 at 3:45 pm
(112) Willie says:

Dear Mr Perze, I am a postal employee, and my question is can i withdraw from my retirement fund for financal hardship

October 23, 2010 at 4:21 pm
(113) agnes says:

Hello Mr. Perez, Hope you can help me, I just rolled over a 401k from my ex employer to a traditional IRA. Now I realize I will need to borrow or withdraw about $5000.00 from it. Will I be able to do this so soon after rolling over? Thank you.

November 6, 2010 at 1:40 am
(114) Hunt says:

Dear Mr. Perez,

I have been unemployed since August (it is now Nov), and I am considering withdrawing Roth IRA money I have held for more than 5 years to pay medical insurance premiums for my family. Can I do this without penalty?

If I withdraw the money, and then find I don’t need to spend it all, can I put what I don’t use back in a Roth IRA? and if so, how much time do I have?


January 1, 2011 at 6:14 pm
(115) Brian says:

Mr. Perez,

I just completed an IRA rollover to a Roth IRA and I am not yet 59 1/2 yrs. old. In doing this rollover, I had taxes taken out of the IRA, which I believe is a distribution. Do I have 60 days to get the money returned to the IRA (i.e.- I pay it back), to avoid the 10 percent penalty? Thanks!

January 10, 2011 at 3:41 pm
(116) Andrew says:

If I bought an investment property that I have always rented and never lived in would I still qualify for a zero penalty IRA withdrawl?

January 21, 2011 at 7:01 pm
(117) angelo says:

I have been unemployed for over 2 years. I did not qualify for unemployment in 2010 and had no income. I took a distribution from my roth ira to support myself. Since I have no income to report for 2010 taxes, what/how do I file and should I expect to pay as a penalty for early withdraw since I am not 59 1/2.

January 22, 2011 at 11:03 pm
(118) Shelly says:

Mr. Perez,
I just turned 50 and I have been out of work for 2 yrs due to medical problems. I just filed for disability, but have not heard. I have only $7100 to my name in my IRA. Due to all my medical expenses, I have depleted my savings to pay for those and other bills. My sig. other helps too. I have just qualified for a food card. I also applied for mortgage need. My question is that most of my monthly bill right now goes to doctor bills and prescriptions. Is there a way to “put away” some of my early IRA $ in order to get to the $2000 I need to get medicaid? I owe people $. Can I give it to them? I have no assest either, except my house. Thank You! Shelly Craig

January 29, 2011 at 5:56 pm
(119) melissa says:

we cashed out a ira during husbands unemployment. We had to make 7 months cobra health ins. payments. Can I deduct these from the amount cashed out, do I need a paper trail or other documents?

January 31, 2011 at 10:14 pm
(120) Rhonda says:

Dear Mr. Perez,

Re: IRA Distributions used to pay higher education

I used a Roth and a Traditional IRA to pay the balance of my schooling because I was denied further student loan monies (maxed out). That said, is there anyway I can get a tax break? I used all of it for school. Can I somehow prove to them I used it for school? Would there have been a way to distribute the funds directly to the school to avoid the penalty?

Thank you!

February 1, 2011 at 2:43 pm
(121) Sunshine says:

I had been a homebuyer in the past but it has not been my primary residence for over 4 years. My husband and I just bought our house together. He has never been a homeowner before. The early withdrawl that I took out of my 401k to use towards the purchase, can I include that under penalty exceptions for first home purchase?

February 26, 2011 at 4:53 am
(122) Monica says:

Before we were married, my husband took out money from his 401k to help his parents who were in financial hardship. That was 6 years ago. He received a letter from the IRS in 2010, stating that in 2008 he did not declare the money from the distribution as income. Does it need to be declared every year? Does the interest on the money need to be declared? or did he not declare it in the first place, and the IRS just found out… concerned wife with non-money-saavy husband.
thank you

February 28, 2011 at 10:13 pm
(123) William Perez says:

Only withdrawals (also called distributions) from a 401k or other type of retirement plan are reported on the tax return. Basically, the IRS is saying he forgot to report a distribution from his retirement account on his tax return.

October 29, 2011 at 11:37 pm
(124) http://401ktips.net says:

I do believe all the ideas you have presented to your post. They are really convincing and can definitely work. Nonetheless, the posts are too short for beginners. May just you please lengthen them a bit from next time? Thanks for the post.

November 29, 2011 at 10:30 am
(125) David says:

I am an admissions counselor for a truck driving school in New Mexico. I have a possible student who would like to enroll in my 4 week course in which upon completion he will receive his commercial drivers license. Would this type of school/academy qualify as “college” tuition?

January 6, 2012 at 12:17 am
(126) Ben garcia says:

I DON’T understand why I kept on paying IRS after my retirement last 2004 at 65 years old for early withdrawal of my retirement. I was charged for max penalty and interests until now even at 72 years old and no longer work . I got lots of undeclared tax exemption as enermous amount of money I gave as a gift to my daughter as down payment for a home loan and business and oversea travel expenses and lots of medical , but that was more then 8 years ago. I got a heart bypass surgery 10 yrs ago. do you think these will help to wipe out all my remaining what I still owe from IRS and a possible refund due to over payment considering my age and physically no longer fit to work as a heavy duty truck driver. I will appreciate any help or advice .
Thank you so much, Ben Garcia

January 7, 2012 at 11:56 am
(127) Ben Garcia says:

I need answer for above comments,please

January 7, 2012 at 5:47 pm
(128) William Perez says:

Ben Garcia, you should consider consulting with a tax professional, who can analyze your finances and your tax history, analyze whether there are ways to reduce the amount you owe to the IRS, and help you develop a plan for paying off what you owe the IRS

January 12, 2012 at 3:20 pm
(129) DCOOLEY says:

Can I talk make out of my IRA to pay for my in-laws medical bills and have it be tax free?

February 6, 2012 at 6:43 pm
(130) Judy says:

When I was laid off at 55, I took a portion of my 401K and rolled over balance to IRA. If at age 56, can I still take out money from my IRA, with no penalty, because it came from my 401 k originally. Or now because it is in an IRA, do I have to wait until I am 591/2.

February 6, 2012 at 7:11 pm
(131) William Perez says:

Judy, an excellent question. Because the funds are now inside an IRA, you’ll have to wait until age 59.5 if you want to avoid the early distribution penalty.

February 9, 2012 at 2:41 am
(132) Emmanuel says:

im gonna cash out my traditional IRA.. it only has 4,200 in it.. I’m gonna get 10% penalty on it and 1% to the state.. my question is if i take just the 10% federal and 1% tax on it will i have to pay when i do my taxes next year? or should i take out 20% federal and 3% state and will this help me avoid paying for 2012 taxes?? what do you recommend


February 10, 2012 at 12:10 am
(133) William Perez says:

Emmanuel, it’s better to take at least 20% federal withholding. That assumes the 10% early distribution penalty plus 10% federal income tax, which is the lowest federal tax bracket for 2012. Your tax bracket might be higher than this, however. Thus 20% withholding for the feds is the minimum suggested withholding. You might end up with additional tax to pay, but that’s hard to tell from the information provided.

February 12, 2012 at 12:24 pm
(134) Donna G says:

I am 45 years old. I had to withdraw $35,000 from my traditional IRA in 2011 due to disability(disabled 09/2009). What taxes do I owe – the 10% for withdrawal but not the additional 10%(My form 1099-R lists 3 in Box 7. Just wanting to make sure I am doing this correctly. Is this $35,000 considered “income” for year 2011?

February 22, 2012 at 12:27 am
(135) Tyler says:


My wife will be working as a teacher for the next couple years, then I will be heading off to grad school, and she will be staying at home with the kids. Can she put her 401(k) into her traditional IRA. And then can we use those IRA funds to pay for health insurance premiums and a down payment on our first home? She will have only had the IRA account for 3 years, but can we still take it out for health insurance premiums and a home down payment within the 5 year period? Also is there any time period that you have to wait to withdraw IRA funds transferred from a 401 (k) so you don’t have to pay the 10% penalty?

February 22, 2012 at 4:06 pm
(136) kathy says:

We had to cash out a ira early (not 59 1/2) we had 20% takken out and also had federal and state taxes takken out. When we filed income taxes they took another 10%. Should this have been done?

February 28, 2012 at 4:39 am
(137) William Perez says:

Kathy, there are two taxes assessed on IRA distributions: the regular income tax, at rates ranging from 10% to 35%, and an additional tax of 10% on an early distribution (taken before age 59.5). Financial institutions often withhold at a flat 20%, but this is quite often an insufficient level of withholding. There may be state taxes and state surtaxes as well.

March 2, 2012 at 7:02 pm
(138) nancy says:

Am I considered a first time home purchaser and able to qualify for exception to the 10% penalty for early withdrawal for IRA distributions to pay mortgage, following divorce? I am 58 years old. Thank you.

April 9, 2012 at 3:02 pm
(139) Amy says:

Question: I got a distribution from my ex-husbands pension when the divorce was settled…. I am doing my taxes now and it tells me that I “made too much” to claimn the educational credit now…. I made $58K and got $40K on the 1099R…. Why is it figuring this into my educational credit and shouldn’t it be just looking at my “earned” income?

Please help ASAP!!!!!

April 10, 2012 at 1:59 am
(140) William Perez says:

Amy, both the American Opportunity credit and the Lifetime Learning credit are based on your adjusted gross income. You can review these income phaseouts are shown on Form 8863, page 2 — Part III for the American Opportunity Credit and Part IV for the Lifetime Learning Credit. This could help you review whether your tax software is computing the income limitations correctly.

June 4, 2012 at 10:13 am
(141) steven says:

My children go to private parochial school and the costs is expensive. I was working 2 jobs but had to give one up since the other one was sold and they wanted me to commit to full time. Unfortunately that has left a gap and I am now struggling to make ends meet. I am maxed out on my home equity line and have a CC bill outstanding. I figured I’d take money out of my IRA, rolled over from a old 401k, and pay the CC bill(approx. 18% annual) and give myself some breathing room on the home equity line. Does this make sense to you as compared to trying to increase the equity line? I figure what good is the IRA if I lose sleep and my health worrying about the outstanding bills I won’t make it to retirement.

July 16, 2012 at 2:11 pm
(142) Patti says:

I have a 401k from a company that needs me to take it out. I am planning on rolling it into my current Roth, but I’d like to take some out to pay off my current mortgage. I understand that I can do this without penalties but that I would lose out on any tax-free growth. question: Will the money inside my Roth plus the new remaining roll-over into my current Roth mean that all the money I invested will be taxed at retirement, or am I still safe with the tax-free money at retirement?

July 19, 2012 at 3:22 pm
(143) Joana says:

Mr. Perez,

I have a regular IRA I am 29 years old and am buying a house for the first time. I am planning on taking out 3000.00 that I need for some improvements on the house when I move in. How would I show that when doing my taxes next year so that I don’t get penalized for it and have to pay taxes on the money.

Thank you in advance for your help.

July 20, 2012 at 3:44 pm
(144) Lynne says:

I’m 24 and am permanently and totally disabled and receive SSI. I am closing out my very small traditional IRA. I understand the penalty can be waived and I have adequate documentation of my disabilities so I’m not worried about that tax at all.

What does worry me is that SSA will count this as income and cut my SSI. Can this happen?

July 25, 2012 at 1:02 pm
(145) mz_ivez says:

My mom is 64 and retired. She has a traditional rollover IRA. She’s thinking of cashing it out and moving overseas. Will she get that 10% penalty or just a regular income tax?

August 15, 2012 at 2:46 am
(146) Malluce says:

Hi William -

I would very much appreciate your help with an issue regarding my taking a withdrawal from my IRA.

Currently I’m a college intern (22) that receives 401k as part of the company perks. However, I decided to roll over the money to a traditional IRA account (Merrill Lynch) once I’m done with my internship. Since I’m living on my own, I want to use this money to pay my tuition and I’m wondering if I can withdraw it without any penalty.

I called the company 401k customer service and they said they will mail me a check and I have to deposit the check within 60 days.

I also called Merrill Lynch but the person is extremely useless. She kept saying I have to go talk to the tax adviser to see if I can get away with the tax penalty.

My question is:
1. If I don’t go talk to a tax adviser (that will probably cost much more than the penalty), how should I withdraw my money for tuition purpose? (i.e., how do I prove it so I won’t get the 10% penalty)
2. The lady kept mentioning the tax? Is that same as income tax? Because I got most of my tax refund since I’m paying a lot for tuition. If it is, does that mean I can get it back once I file the tax report?


August 20, 2012 at 5:24 pm
(147) wendell says:

I got my money out of my IRA and paid a rental property off I didnt know about the roll over rule and IRS hit me with 10% am I able to go back on that issue

August 20, 2012 at 8:49 pm
(148) William Perez says:

Wendell, taxpayers have 60-days to roll-over withdrawn IRA funds into a new IRA deposit. If the rollover didn’t happen in that 60-day window, the IRA is considered taxable at the time of the disbursement. The additional 10% tax relates to an early distribution from an IRA, and there are a few notable exceptions. First, the 10% additional tax applies only if the person receiving the IRA is younger than 59.5 years old. Second, even if a person is under this age, the additional tax is waived if any of the exceptions listed above apply to your financial situation.

August 23, 2012 at 1:01 am
(149) Doug says:

Hi William!

Sorry if you’ve already answered this:

I have a small traditional IRA – no more than $6,000.

I was unemployed this year (no income). In a brief conversation, my banker explained that since I had no other income, I’d only be paying a 10% penalty. Is this true, or did I mis-hear him?

Follow up: Is this penalty paid at the time of cashing it in, or is this simply taxes Id be paying later when I file tax returns?

Thanks so much.

September 6, 2012 at 9:35 pm
(150) Donna Ericson says:

I had to withdraw some money from my IRA. My company closed 2 years ago and I started back to college. My husband lost his job and is on disability. We pay $900 a month for health insurance not to mention all the bills related to his care from the large deductable we have to pay. The IRA is in my name, not his and is a traditional IRA. Are we able to avoid the penalty? If so what do, what forms do we need to use? Is the money taxable income?
Thanks for any help.

October 19, 2012 at 8:35 pm
(151) gina says:

My husband is getting a lump sum payment of $11,200 for a frozen retirement account that he did not even know about from a previous job 20 yrs ago. If he takes monthly payments when he gets ‘of age’ (he is 52 now), he will get $151 per month before taxed. We have decided to take the lump sum since the whole thing was a surprise and we are considering this a blessing!! We owe the IRS $2700 from last year (never have owed the IRS before) but I made a little more and did not pay enough in. Will paying the entire $2700 balance owed from LAST year in full (instead of $38 pre month payments) prevent us from paying the tax penalty on the retirement cash out? We do not have a tax levy. Secondly, I am going to school and have been countint the money I have paid for tuition on my taxes. It is not an accredited ‘college’ but is a diploma program. I have a copy of my transcript with grades to prove attendance. Would that be a second possible way we could prevent having to pay that additional 10% tax on taking lump sum cash out? Thanks SO much. We desperately need every dollar we can get.

October 30, 2012 at 5:00 pm
(152) Tina says:

My husband has a small roth ira ($2500) and he is 66 years old. If he puts that amount on our principal (mortgage), will he have to pay a penalty? Thank you.

November 11, 2012 at 10:11 pm
(153) Nick says:

Mr. Perez,

My wife and I bought a house nearly three years ago. My wife is not on the loan or title. My house is way too small for my 2 children, wife and myself to live in. I have already found out I cannot use the first time home buyer program since my wife and I were married at the time of the purchase. Is there any way I can cash out part of my traditional IRA to help make a down payment on another house and not get penalized the 10%? I read I can cash out up to $10,000 to help my wife, myself, grandchildren, parents to buy a house without a penalty. Is this the case for my wife and I?

December 26, 2012 at 3:05 pm
(154) June Beharry says:

Mr. Perez., I am 53 years old I’ve worked only six months out of the year. I have to make an early distributions. I live in the state of Georgia for the last 5 years. I would like to know or have an idea of how much penalties and fee will run into if I cash out 15,000 dollars? I am afraid to just cash the money out even though I have to as soon as possible. Can you help?

January 12, 2013 at 8:03 am
(155) John says:

May you please clarify if you can claim the lifetime credit in addition to withdrawing from a Roth IRA and not paying the 10% penalty to pay for school? I have heard you can’t, but can’t seem to find any evidence of not being able to do this in Publication 970 under lifetime learning credit or Education Exception to additional tax on early IRA distributions.

January 31, 2013 at 5:54 pm
(156) Amanda says:

i do have a question i’m not sure how the whole retirement thing works. but last year i left my job and started a new job, i didn’t take out my retirement from my pass job and i didn’t do a rollover, but i did receive a 1099-R form from them this year. how is that possible without me receiving any cash or without rollover
thank you

February 1, 2013 at 6:12 pm
(157) Kristie says:

Hi there! I took an early withdrawal from a Roth IRA last year (2012), however, the $ I withdrew is NOT subject to the 10% tax penalty because I meet the first time home buyer exception. My questions is this: How do I report this on my taxes this year? Is there a specific form I need to fill out? How do I let the IRS know that I am utilizing the first time home buyer exception? My understanding is that I would need to fill out form 5329 if I OWED the 10% penalty, but IRS publication 590 does not make it clear what steps to take if you do NOT owe the penalty.

I’ve tried calling the IRS, but I have a 3 year old, so there is always a crisis I need to attend to after 30 minutes on hold, so it makes it impossible! Any help you can provide would be so greatly appreciated!

February 9, 2013 at 12:33 am
(158) Carlos says:

Dear Mr. Perez.

My wife who is 56 was included in massive lay off we had in the area where we live last year. At the time she was 55 years old.

She had her retirement funds in a company sponsored 401k and it was paid to her in a lump sum. She performed a direct roll over from her 401k account to a new qualified retirement account which was a combination of a private pension fund and an IRA.

During the same year she was laid off, she withdrew $34K from it to pay off our home with the goal being to reduce our negative cash flow.

For 2012 taxes the $34K will be added income and we will pay the additional income tax required.

However my question is, since it was a direct rollover to the new qualified retirement account and IRA, will we have to pay the 10% penalty on the withdrawal amount?

All we did was to have the custodian/trustee of the employer 401k plan directly transfer/rollover the funds to the new qualified/managed account. It remained there for less than 60 days and was withdrawn well within the year period to use as the pay off for the home.

February 9, 2013 at 1:13 pm
(159) William Perez says:

Carlos, distributions of pre-tax funds from an individual retirement account are subject to the income tax, and may also be subject to an additional 10% surtax if the distribution occurs before the taxpayer has reached age 59 1/2. There are some exceptions under which the surtax does not apply. In your wife’s situation, the surtax applies because she withdrew the funds from an individual retirement account, her age at the time of the distribution was 55 or 56 years old. Since she was under age 59 1/2, the surtax would apply, unless she meets one or more of the other exceptions. However, if she had instead withdrawn that same money directly from the 401(k), the surtax might not have applied. The rules for the surtax on 401(k) plans are slightly different. For 401(k) plans, if a distribution is made to a person age 55 or older and they are no longer working at that firm, then the 10% surtax isn’t applied to that distribution.

February 9, 2013 at 11:22 pm
(160) Pam says:

I borrowed money years ago against my IRA. I was paying it back thru my employer. For some reason, the deductions stopped, at that time, I thought that it was paid in full. I find out years later when calling to get my IRA balance, that there was a balance with a large interest added. There are no statements sent quarterly nor on a regular basis
about this loan. I was thinking that they would have taken the money that I owed from my IRA instead of charging the interest on the loan.
I also thought that any debt that is not sent out to customer would have been written off. When does a company file for a debt to be written off?
Am I still responsible for this debt? It was over 10 years ago. Its not even a record on my credit report. The initial balance was about $1000 and escalated to $8000 due to interest.

March 4, 2013 at 1:20 pm
(161) JOJO says:


March 4, 2013 at 1:20 pm
(162) JOJO says:


March 4, 2013 at 1:20 pm
(163) JOJO says:


March 4, 2013 at 1:20 pm
(164) JOJO says:


March 4, 2013 at 1:20 pm
(165) JOJO says:


March 4, 2013 at 1:20 pm
(166) JOJO says:


March 4, 2013 at 1:20 pm
(167) JOJO says:


March 9, 2013 at 11:43 am
(168) David says:

Dear Mr. Perez,

I am assisting a friend with his taxes. He has been employed as a defense contractor overseas for the last 15 years. During that time, he has always qualified for the foreign income exclusion. This past year, he took an early distribution from his empoyer sponsored 401k plan. The distribution was not considered hardship and was taxed by the program before disbursement. All of his contributions into this plan have been through payroll deduction and would have been earned income that would not have been taxed due to the foreign income exclusion. Although he had an early non-hardship withdrawl, as he is under 59.5 years, he understands the 10% tax penalty. My question is cannot the taxable portion of the disbursement be considered income also covered by the foreign income exclusion? He passes the physical presence test and his gross income from employment was approximately $30K. I think that I could add the income back into the form 2555-T and as it was all from overseas employment, should still be execused from tax now. Please advise.

Thank you.


April 5, 2013 at 6:09 pm
(169) Fritz says:

I withdraw my ira money to purchase a house and im a first time home buyer. The bank withheld 10% for federal tax. Only half of the ira money was spent at closing. Do I need to return the left over money back to my ira account? If I dont return it since I had so much expenses (fence, appliances, inspection etc…), how will I get taxed and how much penalty for that money that was not used at closing?

April 23, 2013 at 7:14 pm
(170) Nicole says:

I am so confused and I need an honest response!! I have a simple IRA plan. I’m 25 own my house, have children, and married but my husband has been recently laid off. I don’t want to max out credit cards so I was gonna take from my IRA but is it worth it? I no about the 10% but can someone explain it to me as easily as possible. Will it mess me up really bad when I do my income tax? Will it mess up my pay checks? I just feel when I call or ask my office accountant they are not honest. Thank you!!

June 8, 2013 at 3:56 am
(171) Patricia says:

Mr. Perez…I am unemployed, divorced, 58 yrs old and received a divorce settlement of $400,000.00 to which $300,000.00 was rolled into an IRA and the remaining into liquid assets. From the $100,000.00 I have had to pay for my lawyer. income taxes,purchase a used car, car insurance, food and medical expenses.Is the money I have taken out ($45,000 ) considered an income when applying for government assistance. I have no money otherwise & the taxes are high

June 8, 2013 at 2:57 pm
(172) William Perez says:

Patricia, I am not sure what the rules are for government assistance, so I’m unable to help you there.

June 18, 2013 at 1:19 pm
(173) tom hallenbeck says:

I am still confused, my wife took an early withdrawl of her personnal traditional IRA before age 59. we know that the 10% penalty is in effect however why is withdrawl amount subject to additional income tax when all of her investments yearly is already taxed as regular income. how can this income be subject to tax again?

July 18, 2013 at 8:20 pm
(174) Denisse says:

Hi Mr. Perez. I would greatly appreciate if you can give me some light. Me and a family member are about to close on a house. The portion that he took out of his ira account was 200,000 we are in the state of Florida. I asked him if he took taxes out, he told me no. He is 76 years old. I am worried that I can’t even sleep because I am worried that the irs will put a lien on the house. The account was an ira in an investment company. Please help.

July 18, 2013 at 10:24 pm
(175) William Perez says:

Denisse, all your family member needs to do is pay any tax on his IRA distribution. He can consult with an enrolled agent or certified public accountant to help him figure out how much tax he’ll need to pay on the IRA funds.

August 26, 2013 at 10:21 pm
(176) suj mishra says:

Mr Perez,

I have about 50K is captial loses over the past few years. Can I withdraw 20K from my Rollover IRA for an emergency and deduct this money fro the 50K in losses? Appreciate your thoughts. Thanks!


August 28, 2013 at 3:44 pm
(177) William Perez says:

Suj, good question! Capital losses that are carried over offset any capital gains in full. If you have a net capital loss overall for the year, only $3,000 of that is currently deductible, and the remainder carries forward to the following year. An IRA distribution is ordinary income (and not capital gain income). The 50k in capital losses cannot directly offset a 20k IRA distribution. At most, it can indirectly offset that income using the net $3,000 capital loss deduction.

September 24, 2013 at 8:02 pm
(178) JAG says:

Hi, Mr. Perez..

I’ve been scouring your responses for expansion on the “You bought a house for the first time” exception. I paid cash for my first home and used a “general purpose loan” from my TSP for the purcahse. When I leave my position next year, the remaing balance (about $39,000) will be declared a “taxable distribution.” (I cannot afford to pay off the loan.) I had thought the entire balance would be subject to the 10% penalty until I saw your list. Is there a limitation on the amount or the amount of time that elapsed? (I took out the loan in May 2013 and closed in June 2013, it will be declared a taxable distribution sometime in 2014.)

[Good article and you've answered a lot of intriguing questions. It looks like you were a bit innundated, so I completely understand if you don't answer the specific question.]

October 5, 2013 at 11:28 pm
(179) HELEN says:

I am 55. My husband died last year at age 54. I inherited his IRA. The bank says I have to start withdrawing money this year. Why? I thought I get a penalty before 591/2.

October 7, 2013 at 5:09 pm
(180) Ken says:

I have a question relative to Social Security Disability lump sum payment and taxes for prior years relative to an early 401K withdrawal.

Do I have to list my early distribution 401K for each of the prior years in my adjusted gross income totals used to calculate how much taxes I will owe on the lump sum?

My point being Social Security denied me benefits for years then in the hearing stage they caved in and granted full disability back for three prior years and more. I drew out my retirement to live on and pay medical bills while I fought them. I have paid the 10% early withdrawal penalty as well as all the taxes on the 401k money. Now they want to tax my disability lump sum payment for those years! If they would have paid I would not have had to tap my retirement fund. In this case it would have been much better to go deeply into debt by taking out a second mortgage rather than use my retirement funds and having to pay taxes and penalties then as well as have my income inflated by the withdrawal relative to income and Social Security taxes. Any thoughts or advise?

October 8, 2013 at 5:38 am
(181) William Perez says:

Ken, <a href=”http://www.irs.gov/publications/p915/ar02.html#en_US_2012_publink100097893″>lump sum payments from Social Security</a> are typically taxed in the year received, even if the benefits are for a previous year. (<a href=”http://www.irs.gov/publications/p915/index.html”>Publication 915</a> has this and other details on how Social Security benefits are taxed.) For your 401(k) distributions, you might have been eligible to waive the <a href=”http://taxes.about.com/od/retirementtaxes/a/early_penalty.htm”>10% early distribution penalty</a> due to being disabled. You may want to consult with an enrolled agent or certified public accountant to review your previous tax returns to see if you overpaid.

October 13, 2013 at 12:31 pm
(182) Lori says:

Hi, I hope you can answer my question,

I have medical expenses this year ($2455) that equal approx. 6% of my salary. In I have been paying COBRA for 6 months due to a switch in employment due to my own choice- which amounts to $3443. My salary is $40,000 yr. – My question is- can I withdraw from my IRA and use the medical expense exclusion to avoid the 10% penalty since my medical COBRA is not due to unemployment?

Thank you for your assistance!


October 16, 2013 at 12:27 pm
(183) Jonna says:


I quit my last job, and I just got a check in the mail to cash in my Roth IRA. It only has a few hundred dollars in it, and they took 20% out already. If I cash it will I have any penalty? I’m only 24, so I’m not at the required age, but I thought since a Roth is already taxed, and they took 20% out already for I’m assuming some sort of penalty – I didn’t know if there’d be any other penalties.

Thank you,

October 21, 2013 at 5:17 pm
(184) Gail Wilson says:

I am permanently disabled and retired due to disablement; my 401K was rolled over to a check disbursement to a custodian & sent to me; I haven’t sent the check to the custodian yet & 60 days has gone by. I did set up the new IRA account with the custodian and the check is made out to the custodian with an FBO to me. So, even though this will be deposited to my account which was set up before the distribution took place, and I will not be touching my money, will I wind up paying taxes or penalty for being slow to send the funds onward? I didn’t receive any deposit slips etc. from my investment firm custodian, so I was waiting for that ( I also had thought I’d read that I had 90 days to get the check, funds, in to the custodian they were made out to). How do I show them and the IRS I am permanently disabled? I do get social security benefits for my disability, however there is nothing on yearly tax forms to specify my disablement.

November 19, 2013 at 11:13 am
(185) John K says:


My wife had to leave her job a year ago because of cronic migraines. She never recieved unemployment and was turned down for social security disability benefits. She is rolling over her 401k to an IRA but needs to take a portion to pay off debts from being unemployed for a year, COBRA payments, etc. Can she avoid the 10% penalty?

November 25, 2013 at 11:32 am
(186) Greg says:

After 17 years with my company I lost my job and was denied unemployment. Can I withdraw from my IRA without a penalty. I have no income at this time. Is there a hardship withdrawl I can claim at tax time? I will have to pay for Cobra insurance.

November 26, 2013 at 2:08 pm
(187) Olivia says:

Does an early IRA withdrawal effect what tax bracket we are in? For example, if we make $65,000 this year and we close out our IRA accounts early, giving us an additional $9,000 to our accounts (post penalties), would that push us up to the 25% tax bracket?

December 5, 2013 at 7:15 pm
(188) Omar says:

In February 2014 I will be 70 y/o. I work keep on working with the same employer that sponsors my plan. What are the consequences if I request a) a lump sum withdrawal? B) a monthly payment until I stop working with the company?

December 17, 2013 at 10:18 am
(189) Tom says:

Question regarding early withdrawal of IRA funds:
I lost my job in April of this past year, I was able to find another position but it was straight commission without any base salary.
I was not able to earn enough to cover our monthly bills, so I liquidated my traditional IRA to offset the difference.
Will I charged the 10% early withdrawal penalty?


December 30, 2013 at 5:18 am
(190) jj says:

I filled out and submitted the withdrawal form in Dec 2013, but will not receive and cash the actual check until Jan 2014.
What tax year will this be in, 2013 or 2014?

IRS pub just says “in the year you receive it” but does not elaborate.

December 30, 2013 at 4:24 pm
(191) William Perez says:

JJ, the IRA distribution will likely be included with your 2013 income. I cannot find this documented just right now on the IRS web site, but it’s been my experience that the day when a person instructs their IRA custodian to distribute funds, the custodian usually does so in a day or two. I’m pretty sure it’s the date the custodian distributes the funds and not the date you receive a check in the mail or a deposit in your bank account. Good question!

December 31, 2013 at 10:14 am
(192) YL says:

I was unemployed but need to keep up the child support payments, so I’d cashed out my IRA. The total is around 80k, if I have to pay the penalty plus income taxes, then I will not be able to do so in the coming up tax year. What options do I have since I am still mostly unemployed but just have part time work to keep the ends meet? Really need help! Thank you very much.

December 31, 2013 at 8:50 pm
(193) William Perez says:

YL, good question. Unless one of the exceptions applies to your situation, distributions from an IRA are subject to both the income tax and the 10% surtax. You may want to consult with a tax professional about how best to handle the situation.

January 2, 2014 at 12:34 pm
(194) Melinda says:

Can I withdrawal $10K from my SIMPLE IRA for a first-time home purchase a month after I purchase the home without incurring the 10% penalty? I’ve had the SIMPLE IRA for 10 years and I haven’t owned a home for the past 5 years. I’ve read that the IRS says that the IRA funds have to be used “within” 120 days of the distribution, but I didn’t see clarification of whether or not the closing date could be less than 120 days BEFORE the IRA distribution. I ask this because I have funds for the down payment, but I’d like to build a fence around the yard and finish a portion of the basement. I understand that these type of improvements made within 120 days of the purchase and the IRA distribution would be acceptable for the penalty exemption. Thank you in advance for answering my question!

January 11, 2014 at 10:53 am
(195) Ladybug says:

my husband is retiring in March at age of 62, can we take his 401k and put it into cd’s at our local bank without being penalized?

January 16, 2014 at 11:23 am
(196) Betty says:

I was unemployed and cashed out the only income I had which was a $10,000 CD. Is there a hardship for it so I do not have to pay the 10% penalty? Which form do I use, if so, when I do my taxes? I am living with family and not able to afford my own place. Living on that money to prevent homelessness.

January 16, 2014 at 3:58 pm
(197) William Perez says:

Betty, was the certificate of deposit (CD) held inside an individual retirement account (IRA) or not?

If not held inside an IRA, there is no 10% early distribution penalty as that penalty applies only when funds are withdrawn from a retirement plan such as an IRA. In this case report any interest earned on the CD (you should get a Form 1099-INT), and report any penalty you paid to the bank to cash the CD early as a deduction.

If the CD was held inside an IRA, you will receive a Form 1099-R reporting the income from the distribution. Use those figures when reporting your income. You might also need to pay a 10% surtax in addition to the regular tax if you are under age 59.5.

So first you’ll need to clarify for yourself whether the certificate of deposit (CD) was held inside an individual retirement account or not. If the CD was inside of an individual retirement account, then it’s possible that the 10% early distribution penalty might apply.

January 21, 2014 at 11:39 am
(198) V says:

I read JJ question about him filling out the forms in Dec. 2013 but will not receive money until Jan. 2014. My question about that is “How long do IRA check take to mail to someone or how fast will one person receive that money to them.” I need to take out money from my Traditional IRA to pay for Medical Expenses and I am unemployed since January 1, 2013. But I had went to hospital in September 16, 2013 for stomach ulcer and bills start to pile up right when I was in the hospital and had not payed my medical expenses since September/October of 2013. Now its January 2014. If I take out money from my Traditional IRA right now in January 2014 to pay for my medical expenses I had in September 16, 2013 will I still have to pay the 10% tax penalty for paying medical expense bill now and not in that 2013 time frame. I read that someone does not have to pay the 10% tax penalty if the medical expenses is over 7.5% of your gross income and that you pay the medical bill 60 days before you were re-employed. I was re-employed September 14, 2013. I was thinking about paying for my medical expense bill now at January 21, 2014. I never been in a situation were I had to take out money from my Traditional IRA to pay for something big like Medical Bills and wondering what the penalty will be.

February 4, 2014 at 11:22 pm
(199) Krista says:

Mr. Perez,
Back I July I cashed in my simple ira. I paid all the fees and such that they said we’re required and took what was left. Believing that I had paid everything needed I never gave it another thought. So now I have already filed my tax return and afterwards recieved a tax document for this ira. It was for less then $700. Do I need to amend my tax return to include this information ? Or since it was such a small amount do I even need to claim it? Please let me know what to do. Thank you.

February 7, 2014 at 6:03 pm
(200) GD says:

A friend whose wife passed away in 2013, took out $90,000 from her IRA and gave it to her sister and parents before she died. No taxes were taken out and the husband is now stuck with a huge tax bill. The husband had no clue she had done this and her family do not want to discuss it.How should he file his taxes for 2013?

February 9, 2014 at 11:53 am
(201) Valerie Walker says:

Yes the doctors pulled my husband out of work February of last year.He has trouble breathing.He drew short term disbility then it went to long term disbility which he is still drawing.He also withdrew most of his 401K.Then he was told where he was no longer an employee he would have to withdraw all of the 401K.Will he be subject to the 10% penalty.He will be 55 in August.

February 12, 2014 at 1:38 pm
(202) kirk says:

i am disabled permantly do to an acident and have 75000 in verizon company pension
i can get lump sum as of july 1st and need to to pay off house(54000) so i can have enough to buy the right food as i live off of raman noodle and pasta wich is trashing my diabeties and i drive less than 700 miles a yr due to not having money for fuel
if i take pension amount its only 315 dollars a month but if i pay off house i will have almost 800 a month extrapayments high due to not good credit which is why i have not refinance
how would i avoid the most tax and not trash my social security or if you could direct me to any no charge info that would be great
i have no complaint or i ma not trying to cheat my country i served 15 yrs now im just an old fat disabled ex airborne trooper who was able to got to school because of service

February 23, 2014 at 11:19 pm
(203) angie wybraniec says:

Hi! I took out my ira funds for a home but didn’t know there was a 120 day period where i can avoid the penalty fee. Now im in the middle of a closing 25 days past the 120 day period and am wondering do i have to report this to the irs? Can you swing it and not report the withdrawal? What is the chance of getting audited? I heard they dont really check but i dont want to risk it and pay the fees in my near future when they realize i was past the 120 day mark.

thanks for your time

March 17, 2014 at 8:22 pm
(204) joe says:

I have been permanently disabled since 1984– and i am 70 1/2, come April 1, 2014, and my pension people and the retirement account people [ 2 separate groups ] refuse to note the permanent disability to each other- [ or IRS ] and then tell me I have to take a RMD or face IRS fines; although the IRS rules clearly say “I am exempt from taxes” on disability funds sent in, and because of my permanent disability and hardship, [ I have both- plus had 2 back operations in late 80’s / early 90s, , then heart surgery June 2010--open heart surgery July 2012 ] and I have not had ANY Gainful employment for 31 years, yet they refuse to give me the money garnered from the no tax funds sent in by my employer [ a college ] and “no taxed” insurance company / and State pension plan funds [ $300,000+ ] again gotten by virtue of a disability / no gainful employment process–that placed funds into my retirement plan. They say I have 3 different plans, which I never knew about, and I must do a RMD in each one separately, because the state changed the plans from a 401 individual plan to a Group 403 -in 1995–and I placed some funds in an IRA for a liquid access–Ii want only the non tax money first, then pre tax money last, since I was gainfully employed for 14 years,1969 thru 1983 – until permanently disabled. Suggestions welcome

March 17, 2014 at 8:36 pm
(205) joe-2 says:

when was RMD – IRS code passed??? AND WHY, what rational was used by IRS, and DID Congress approve this?
What can be done when a person is 70 ½, has NO INCOME or Gainful Employment for 31 years, although there was 14 years of “gainful employment” before “permanent Disability and then retirement Funds were added for 31 years by Disability Insurer and State Government agency, to an out of state pension fund. I am asking for No taxed money first, based on a large su of money i that format, done for 31 years. IRS has rule for “disabled as NO tax”, as well as “hardship no tax?” Both pension groups refuse to do separate distributions, but say I am required to do RMD for 3 funds I know nothing about, and I was never told about these 3 funds until now?

March 22, 2014 at 5:42 pm
(206) tracy says:

I am age 60. I recently bought a second home in a neighboring town. I plan on selling my first home ASAP and paying off the mortgage on home #2 with the equity from home #1. What kind of capital gains taxes will I be subjected to? Thanks very much

March 23, 2014 at 4:54 pm
(207) Don J says:

My situation is that I took money from my 401k so that my wife could stop working and finish her advanced degree (Advanced Nursing degree. Am I liable for the 10 percent penalty?

April 4, 2014 at 8:03 pm
(208) Robert Smith says:

To your knowledge, is there ever a circumstance by which an early withdrawal does not have to be considered as income and does not impact the AGI for that year? I lost my job and did not have health insurance, but then was diagnosed with cancer and began treatment. I pulled funds from an IRA in order to make a downpayment against the hospital costs that I was beginning to incur. I eventually secured more health insurance, but the initial outlay was strictly to pay for health care. Is there and situation or rule that would allow me to have these early distribution funds not considered as income for that tax year?

Thank you.


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