IRA distribution rules are a mine field. One wrong move and you can discover yourself faced with high taxes and penalties that may wipe out years of savings and investment. Complicating matters is the Darwinian evolution of IRAs that have taken place since the first IRA was introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA ). Since '74, IRA rules have altered dramatically and legislation was enacted to rigorously punish those who don't follow the rules, to the letter of the rule. IRAs come in a lot of flavors but, for purposes of this article we will focus on the 2 key forms of IRAs: Traditional IRAs and Roth IRAs.

Techniques 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 10 percent penalty on the taxable amount received in a distribution. There're specific IRA distribution rules that can be used to avoid the burden of this early withdrawal penalty.

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 Using IRA Money to Purchase or Construct Your First Home - Up to $10,000 may be withdrawn from an IRA as an early distribution penalty-free, so long as the distribution is used to purchase, build or rebuild a first house for yourself, your partner,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

2. Using IRA Money for Medicinal Expenses - Penalty-free early distributions could be made if the money are used to pay unreimbursed medical expenses which exceed 7.5 % of your adjusted gross income. There is no obligation to itemize deductions in order to qualify for this exception.

3. Using IRA Funds for University Costs - Traditional IRAs can be also tapped to aid fund college expenses; however, the taxable amount of the distributions from these IRAs will be subject to income tax in the year of the distribution.

Roth IRA distribution rules

Roth IRAs have unique regulations with respect to distributions. Contributions withdrawn aren't matter of the 10% penalty and there is no RMD with Roth IRAs. In order 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 meet the five-year rule but not the 59 1/2 year regulation, distributions in excess of your contributions might be taxable and subject to a 10% 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. As a result, Roth IRAs can grow, untaxed, during the lifetime of the owner, permitting a larger legacy for their beneficiaries.

2. 0% Effective Tax Rate - Qualified distributions from Roth IRAs aren't subject to income tax...ever. This means you are unaffected by future tax increases as your effective tax rate is always the same...zero.

3. Conversion Chances - Beginning after January 1, 2010 anybody, irrespective of their income level, may convert traditional IRAs into Roth IRAs. The tax on the taxable income for 2010 conversions can be deferred into 2011 and 2012. If you don't have sufficient 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, such contributions can be a tax-free future funding source for your child's academy expenses.