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

Methods 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 subject to a 10 percent penalty on the taxable amount received in a distribution. There are particular IRA distribution rules that can be used to avoid the imposition of this early withdrawal penalty.

1. Using IRA Funds to Purchase or Build Your First Home - As much as $10,000 may be withdrawn from an IRA as an early distribution penalty-free, as long as the distribution is used to buy, build or rebuild a first house for yourself, your wife, you or your spouse's child, you or your spouse's grandchild or you or your spouse's parent or ancestor.

2. Using IRA Funds for Medical Expenses - Penalty-free early distributions can be made if the funds are used to pay unreimbursed medical costs which exceed 7.5 % of your adjusted gross income. There's no requirement to itemize deductions in order to qualify for this exception.

3. Using IRA Money for College Expenses - Conventional IRAs can also be tapped to help fund university costs; 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 rules with respect to distributions. Contributions withdrawn are not matter of the 10% penalty and there is no RMD with Roth IRAs.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 should have been opened for five years and the distributions must be made after reaching age 59 1/2. If you meet the five-year rule but not the 59 1/2 year rule, distributions in excess of your contributions might be taxable and matter of a ten percent penalty.

1. No RMD - With Roth IRAs, there is no RMD at age 70 1/2. This means a Roth IRA operator is never required 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. Zero Percent Effective Tax Rate - Qualified distributions from Roth IRAs aren't matter of 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 anyone, 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 do not have sufficient money set aside to do a 100% conversion you can do partial conversions.

4. School Costs - Because Roth IRA contributions might be withdrawn, tax-free, penalty-free, at any time, such contributions can be a tax-free future funding source for your child's school expenses.

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