• Individual Retirement Accounts (IRAs) are tax-favorable account structures recognized by the Internal Revenue Service (IRS) as either growing tax-deferred or tax-free. Traditional IRAs allow investors to deduct contributions the year they are made to later add distributions to gross income. Roth IRAs get no deduction for contributions, but incur no taxes when distributed according to the IRS regulations.
  
  

Qualified Distributions

• A qualified distribution is money taken out of either a traditional or Roth IRA once the IRA owner is at least 59 1/2 years old. Roth IRAs have a second qualification requiring the account to be at least five years old in order to avoid any tax consequences. Failure to meet these regulations leads to a 10 percent tax penalty on the taxable distributions. The taxable distribution is 100 percent on the traditional IRA or any earnings on a Roth IRA. The IRA custodian issues a Form 1099-R to the IRA owner and the IRS for qualified distributions to record the amount on line 15 of IRS Form 1040.
  
  

Distribution Exceptions

• Exceptions to the qualified distribution rules allow investors to take assets out prior to age 59 1/2 or the five-year period without incurring the 10 percent tax penalty. Income taxes still apply to these distributions. Exceptions include home purchase, college tuition or hardship distributions. The home purchase exception allows the IRA owner to take up to $10,000 out and apply the money to buying a home as long as he has not owned one in the past two years. College tuition exceptions allow the owner to pull money out to pay for his, a spouse's or a child's college expenses. Hardship distributions include preventing foreclosure, eviction or paying extreme medical expenses that are more than 7.5 percent of the owner's annual gross income.
  
  

Early Retirement

• There is a way for an IRA owner to use IRA assets to retire before age 59 1/2 and still avoid the 10 percent tax penalty. To do so, the owner invokes his rights under IRS Regulation 72(t), which allows equally substantial and regular payments to be made out of retirement assets. This is an irrevocable decision that must continue for at least five years or until the owner reaches age 59 1/2. IRA owners can discuss the option with tax advisers to ensure properly following the regulations to prevent tax penalties.