Individual Retirement Arrangements are a way for lower and middle income working taxpayers to save for retirement. Therefore, there is a 10% additional tax penalty for withdrawing from traditional IRA's before age 59 1/2.

The IRS has made certain exceptions to this rule. Two of these exceptions are very simple. If a person inherits an IRA, he is not bound by the same rules of the person who willed it to him. If the distributions are in the form of an annuity, this rule does not apply.

The rest of the exceptions fall under two categories: enhancing personal and familial economic growth and staving off personal economic disaster.

Under enhancing economic growth are two exceptions: first-time home buyers distributions and qualified higher education expenses.

The first time home buyers distribution is limited to a total of $10,000 over a lifetime. if the taxpayer and the spouse are both first time home buyers, each of them can withdraw $10,000 without paying the penalty tax.

A first time home buyer is not necessarily someone who has never owned a home. As long as the home buyer has not had financial interest in a home during the two years preceding this purchase, he is considered a first time buyer. If the taxpayer is married, both spouses must meet this rule.

The first time home buyer does not have to be the taxpayer, spouse or the two jointly.
Withdrawals may be made for the descendants or ancestors of the taxpayer or spouse.

For instance, a young couple is getting married and the parents have agreed to help them buy a house as a wedding gift. Each of the four parents can withdraw up to $10,000 to help them buy a home. Any grandparents can also withdraw up to $10,000. This is assuming none of them have used the first time home buyer exception previously.

The only other rule is that the money must be used withing 120 days of withdrawal to pay acquisition costs of the main home.

Qualified higher education expenses include any expenses required by a university, college or trade schools. Most, but not all, higher education institutions are qualified schools. Expenses include tuition, fees, supplies and any amount required for enrollment. If the student is considered at least a half-time student, room and board is included in these expenses.

This exception also includes any extra services for special needs students, considering their enrollment in a qualified institution.

IRA withdrawals may be used for the taxpayer,

• 1
• 2
• next page >>

---

Add your voice

Know something about Qualified tax free withdrawals from an IRA?
We want to hear your view. Write now!