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

Strategies for Minimizing Penalties on Early Distributions

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

1. Using IRA Money to Purchase or Build Your First House - Up to $10,000 might be withdrawn from an IRA as an early distribution penalty-free, so long as the distribution is used to purchase, build or rebuild a first home for yourself, your wife, you or your spouse's child, you or your spouse's grandchild or you or your wife's parent or ancestor.

2. Using IRA Money for Medicinal Costs - Penalty-free early distributions could be made if the funds are used to pay unreimbursed medical expenses which exceed 7.5 % of your adjusted gross earnings. There is no condition to itemize deductions to be eligible for this exception.

3. Using IRA Money for College Costs - Conventional IRAs can also be tapped to aid fund college expenses; however, the taxable amount of the distributions from these IRAs shall 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 Contributions withdrawn are not subject to the 10% penalty and there is no RMD with Roth IRAs. So as for Roth IRA earnings distributions to be tax-free, the account must have been opened for 5 years and the distributions should be made after reaching age 59 1/2. If you fullfil the five-year rule but not the 59 1/2 year rule, distributions in excess of your contributions will be taxable and matter of a ten percent penalty.

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

2. Zero Percent Effective Tax Rate - Qualified distributions from Roth IRAs are not matter of income tax...ever. This means you are unaffected by future tax increases as your effective tax rate is constantly the same...zero.

3. Conversion Opportunities - Beginning after January 1, 2010 anybody, irrespective of their earnings 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 do not have enough money set aside to do a 100% conversion you can do partial conversions.

4. School Costs - As Roth IRA contributions may 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 university expenses.

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