IRA Withdrawals Business Law and Tax attorney

n general, it isn't wise to tap your tax-deferred nest egg before you retire because of the penalty you have to pay.

In a pinch, however, you can make early withdrawals from your individual retirement account, penalty free, if you become disabled to need to pay for critical expenses such as medical costs that aren't reimbursed by insurance, college tuition or a first home. (In some cases, you can also use the money to pay for health insurance if you're unemployed.)

In such qualified cases, the IRS won't levy the usual 10 percent penalty for withdrawing the funds too soon, even if you're

younger than 59 1/2 years-old (the minimum legal age for making withdrawals).

There are some restrictions, of course. For example, you can use penalty-free IRA funds to pay only those unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income (AGI). And there's a lifetime limit of $10,000 on the money you can withdraw penalty free to buy a first home. You also have to pay income tax on the distributions at your ordinary rate. Talk with your tax adviser about the best way to tap your retirement money if the need arises.

Another Withdrawal Exception

There's one more little-known way to take penalty-free withdrawals from your IRA before age 59 1/2 — simply by taking a number of regular distributions.

Under this special rule, IRA owners can tap their accounts if the distributions are made as part of a series of "substantially equal payments." The distributions are made over five years, or until you reach age 59 1/2 , whichever is longer. The exact amount of each payment is determined by using IRS actuarial tables, which are adjusted to keep up with the cost of living.

If you must break into your nest egg, this is a good way to avoid the early withdrawal penalty. (You still have to pay the income tax due on the distribution.)

But be warned: There are very strict IRS rules involving these payments. One slip-up and you can be hit with a large tax bill. Consult with your tax pro before making any withdrawals to ensure you comply with the law.