IRA distribution rules are a mine field. One wrong move and you could find yourself faced with high taxes and penalties that could wipe out years of savings and investment. Complicating matters is the Darwinian evolution of IRAs that have taken place since the pioneer IRA was launched in '74 with the enactment of the Worker Retirement Income Security Act (ERISA ). Since 1974, IRA regulations have changed dramatically and laws was enacted to severely punish those who do not follow the regulations, to the letter of the regulation. IRAs come in several flavors but, for reasons of this article we will focus on the 2 main forms of IRAs: Traditional IRAs and Roth IRAs.

Techniques for Minimizing Penalties on Early Distributions

Generally, any distribution from an IRA before you reach age 59 1/2 is considered as an early distribution and is matter of a 10 percent penalty on the taxable quantity received in a distribution. There are certain IRA distribution rules that can be used to avoid the burden of this early withdrawal penalty.

1. Using IRA Money to Buy or Construct Your First House - As much as $10,000 might be withdrawn from an IRA as an early distribution penalty-free, as long as the distribution is used to purchase, build or reconstruct a first home for yourself, your spouse, you or your spouse's kid, you or your spouse's grandchild or you or your wife's parent or ancestor.

2. Using IRA Funds for Medicinal Expenses - Penalty-free early distributions could be made if the funds are used to pay unreimbursed medicinal expenses which exceed 7.5 percent of your adjusted total earnings. There's no obligation to itemize deductions in order to be eligible for this exception.

3. Using IRA Money for Academy Costs - Traditional IRAs can be also tapped to aid fund university expenses; however, the taxable amount of the distributions from these IRAs will be matter of income tax in the year of the distribution.

Roth IRA distribution rules

Roth IRAs have unique rules with respect to distributions. Contributions withdrawn aren't subject to the ten percent penalty and there's no RMD with Roth IRAs. So as for Roth IRA earnings distributions to be tax-free, the account should have been opened for 5 years and the distributions must be made after reaching age 59 1/2. If you fullfil the five-year rule but not the 59 1/2 year regulation, distributions in excess of your contributions will be taxable and subject to a 10% penalty.

1. No RMD - With Roth IRAs, there's no RMD at age 70 1/2. This means a Roth IRA operator is never needed to make a distribution out of their Roth IRA. As a result, Roth IRAs can grow, untaxed, throughout the lifetime of the owner, permitting a larger legacy for their beneficiaries.

2. 0% Effective Tax Rate - Qualified distributions from Roth IRAs are not subject to income tax...ever. This means you're unaffected by future tax increases as your effective tax rate is constantly the same...zero.

3. Conversion Chances - Beginning after January 1, 2010 anybody, irrespective of their income level, may convert conventional IRAs into Roth IRAs. The tax on the taxable income for 2010 conversions can be deferred into 2011 and 2012. If you don't have enough money set aside to do a 100% conversion you can do partial conversions.

4. College Expenses - As Roth IRA contributions might be withdrawn, tax-free, penalty-free, at any time, this kind of contributions can be a tax-free future funding source for your child's school expenses.

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