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TAX TIP: IS YOUR IRA WITHDRAWAL TAXABLE?

April 12, 2007

It's standard tax advice to leave your money in your IRA as long as possible. The longer your money stays in your IRA, the longer it builds up without being taxed. If you take it out too early (generally before age 58 1/2), you often also face a 10% excise tax on top of the regular income tax.

Yet circumstances don't always cooperate. If you took money out of your IRA in 2006, you may be able to avoid or reduce taxes and penalties on the withdrawal.

Sometimes part or all of your IRA withdrawals can be nontaxable. Other early withdrawals are taxable, but aren't subject to the 10% penalty. Keep these exceptions in mind so you don't pay extra tax or penalties on your return:

- Roth IRA contributions can be withdrawn tax-free to the extent of your non-deductible Roth IRA contribuitons before age 59 1/2. Of course, all Roth distributions after that age are tax-free.

- Traditional IRA distributions are tax-free to the extent they are attributable to your non-deductible contributions. Determine this amount using Form 8606.

- Qualifying distributions rolled over into another IRA within 60 days are nontaxable.

- Traditional IRA distributions are taxable, but may be penalty-free, in these situations:

*You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

*The distributions are not more than the cost of your medical insurance.

*You are disabled.

*You are the beneficiary of a deceased IRA owner.

*You are receiving distributions in the form of an annuity.

*The distributions are not more than your qualified higher education expenses.

*You use the distributions to buy, build, or rebuild a first home.

*The distribution is due to an IRS levy of the qualified plan.

*The distribution is a qualified reservist distribution.

You can find more information on whether you qualify to avoid these penalties here.

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