Although 59 1/2 is the magic number for starting to receive IRA distributions without penalty (whether you continue to work or not), there are some circumstances under which you can get at your IRA funds even earlier. Here's a rundown:

Annuitize Your IRA
One way to take money from your traditional IRA without incurring the 10% penalty is to "annuitize" your account. The way this works is that for five years, or until you turn age 59 1/2 (whichever is longer), you will take annual cash withdrawals based on your life expectancy, as predicted by the IRS. To see how much time the IRS thinks you have left, visit the IRS Web site.

Here's an example. If the IRS actuarial tables predict you will live for another 20 years, then you can withdraw 1/20th of the balance in your account the first year. Then 1/19th of your new balance the second year. And so on. During the payout period, your distributions schedule cannot change or you will be penalized. Once the payout period has ended, you can modify the schedule, take a lump payment or stop taking distributions altogether. If you do take early withdrawals, consult a tax expert who has some experience in planning IRA distributions.

Withdraw Roth Contributions
The Roth IRA allows penalty and tax-free withdrawals of contributions for any reason. But remember, once you've taken out that money, you don't have the option of replacing it. For 2005, your Roth IRA contribution is limited to $4,000 a year or $4,500 if you will be age 50 or older at the end of 2005 (less if your adjusted gross income exceeds $150,000 if you file jointly; $95,000 if you are single).

Take a 60-Day Loan
You can withdraw funds from your IRA for 60 days tax- and penalty-free as long as you return the funds to an IRA by the end of that time period. The IRS looks at this as a nontaxable rollover, which means that this is a once-a-year option. Just make sure that the funds are back in an IRA within the 60 days, otherwise it will be treated as a withdrawal that is subject to taxes and penalties.

Special Situations

  • First-time home purchase: Up to $10,000.
  • Qualified education expenses: For you, your spouse, your kids or even your grandkids. Approved expenses include post-secondary education, tuition, books, supplies and, if the student is enrolled at least half-time, room and board.
  • Disability: To qualify for a disability exemption, you must prove that you are incapable of working.
  • Unreimbursed medical expenses: Expenses must exceed 7.5% of your adjusted gross income.
  • Health insurance for the unemployed: Only after 12 consecutive weeks of collecting unemployment benefits.

A final note: Before you start dipping into your retirement stash, you should explore other options including a standard bank loan. If you must withdraw funds from an IRA, avoid paying taxes by withdrawing contributions from your Roth IRA first. And tap a tax-deductible IRA last. Above all, use these tax-sheltered accounts as a last resort. And before you raid your retirement savings, make sure you are leaving enough to support your actual retirement. Use our retirement worksheets to help you make your calculations.

Early Withdrawals From IRAs

Withdrawals for Higher Education
IRA Type 10% Penalty? Taxable?
Traditional IRA No Yes
Funds in a Roth IRA for Less Than Five Years No On earnings, not original contributions
Funds in a Roth IRA for Five or More Years No On earnings, not original contributions
Withdrawals for First-Time Home Buying*
IRA Type 10% Penalty? Taxable?
Traditional IRA No Yes
Funds in a Roth IRA for Less Than Five Years No On earnings, not original contributions
Funds in a Roth IRA for Five or More Years No No

* $10,000 lifetime maximum

Withdrawals for Disability or Death
IRA Type 10% Penalty? Taxable?
Traditional IRA No Yes
Funds in a Roth IRA for Less Than Five Years No On earnings, not original contributions
Funds in a Roth IRA for Five or More Years No No
Withdrawals for Any Other Reason
IRA Type 10% Penalty? Taxable?
Traditional IRA Yes, but there are some exceptions* Yes
Funds in a Roth IRA for Less Than Five Years On earnings, not original contributions, with exceptions* On earnings, not original contributions
Funds in a Roth IRA for Five or More Years On earnings, not original contributions, with exceptions.* No penalty if you are 59 1/2 or older On earnings, not original contributions, unless you are 59 1/2 or older

* Exceptions include: (a) withdrawals for medical expenses in excess of 7.5% of adjusted gross income (b) if you choose to annuitize withdrawals as explained earlier in this article
Source: Your Tax Questions Answered, Ed Slott, Plymouth Press Ltd., 1998.