Traditional, Rollover and SEP IRA Distributions

Taking a distribution from your IRA can have important tax implications. Use the links below to learn more about IRA distribution rules, penalty tax exceptions, and required forms for tax reporting. 

• To take a distribution from your IRA, complete the IRA Distribution Form.
• Want to request IRA distributions by phone? Complete and return the IRA Phone Redemption Request Form.

The following is a summary of the penalty tax exceptions. For more details, see IRS Publication 590-B at www.irs.gov or a competent tax advisor.

Age 59½

When you are 59½ or older, your distribution is penalty-free.

Higher Education Expenses

Your distribution may be penalty-free for certain expenses (e.g. tuition, books, supplies) at certain colleges and other postsecondary institutions. The penalty exception can apply to expenses for you, your spouse, children or grandchildren.

First Time Home Purchase

Up to $10,000 of your distribution may be penalty-free if used to buy, build or rebuild your first home. There is a lifetime limit of $10,000 for the penalty exception, and “first home” means that you have not owned a home in the prior two years. The funds must be used within 120 days after you receive them. The penalty exception can apply to a first home for you, your spouse, your or your spouse’s children and grandchildren, and your or your spouse’s parents. Note that the individual who must meet the definition of a first-time homebuyer is the person acquiring the home–not the IRA owner.

Birth/Adoption

Your distribution may be penalty-free if used for certain expenses of the birth or adoption of a child. Penalty-free distributions are limited to $5,000 in aggregate across all IRAs and retirement accounts. The distribution must be made within one year after the birth or adoption date and may be repaid within three years.

Medical Insurance

Your distribution may be penalty-free if used to pay health insurance premiums when all of these conditions are met:

– You lost your job;
– You received unemployment compensation for at least 12 consecutive weeks;
– Your distribution is taken in the same or following year that you receive unemployment compensation; and
– Your distribution is taken no later than 60 days after you are reemployed.

Unreimbursed Medical Expenses

Your distribution may be penalty-free on certain unreimbursed medical expenses that exceed 7.5% of your income if you’re under age 59½. The distribution must be made in the year that the expenses are paid.

Example: Charlie is 50. His unreimbursed medical expenses are $6,000, his income is $40,000, and he takes an IRA distribution. The maximum amount that Charlie may consider as a penalty-free distribution is $3,000 ($6,000 – [7.5% x $40,000] = $3,000).

Military Reserve

Your distribution may be penalty-free if you are a member of the military reserve; were called to active duty for at least 180 days (or for an indefinite time) after September 11, 2001; and the distribution was taken while you were called to active duty.

Substantially Equal Periodic Payments

Your distribution may be penalty-free if it is part of a series of Substantially Equal Periodic Payments (SEPP). SEPP distributions must occur annually and for five years or until you turn 59½, whichever is later. If distributions are modified, the 10% penalty tax, plus interest, is applied retroactively to all previous distributions.

Disability

Your distribution may be penalty-free if you are unable to engage in any substantial gainful activity. A physician must certify that your disability will be long-term; continuous; of an indefinite duration; and is expected to lead to death.

IRS Levy

Your distribution is penalty-free if it occurs as a result of an IRS tax levy.

Death

Your distribution is penalty-free if you inherited the IRA and the distribution is taken from the deceased’s IRA.

Terminal Illness

Your distribution may be penalty-free if you have a terminal illness.  You must be certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less.

Federally Declared Disaster Area

In the event of a federally declared disaster, you can take up to $22,000 from your IRA to cover such costs as rebuilding your principal residence.  You must have sustained economic loss as a result of the disaster and the distribution must be made within 180 days of the disaster.  The amount of the distribution may be repaid within three years after the date of distribution.

Domestic Abuse

Victims of domestic abuse can redeem up to the lesser of $10,000 or 50% of their IRA during the one-year period beginning on any date on which the individual or their child becomes a victim of domestic abuse by a spouse or domestic partner. The amount of the distribution may be repaid within three years after the date of distribution.

Emergency Personal Expense

Your distribution may be penalty-free if taken to meet unforeseeable or immediate financial needs relating to personal or family emergency expenses. Generally, an individual may only receive one emergency personal expense distribution per calendar year and the distribution may not exceed $1,000. No subsequent emergency personal expense distributions may be taken during the next 3 calendar years until the distribution is paid back.

If you have ever made non-deductible IRA contributions and have more than one IRA, you must aggregate all of your IRAs (e.g. Traditional, Rollover, SEP and SIMPLE) to calculate the taxable portion of your distribution. In other words, the IRS views you as having one big IRA, regardless of how many IRAs you own.

Example:

Many years ago, Jenny made a $2,000 non-deductible contribution to an IRA. Her other contributions were deductible. Today, she has three IRAs that total $10,000.

Jenny redeems $1,000. Since her non-deductible contribution makes up 20% of her total IRA balance, 20% of her $1,000 distribution (i.e. $200) is not taxable, regardless of which IRA is redeemed.

NOTE: This is a simplified example. Be sure to complete and attach IRS Form 8606 with your taxes.