In this economy, you may need to take an early IRA withdrawal -- meaning before age 59 1/2. Needless to say, there are tax implications, including the possibility of getting socked with the dreaded 10% premature withdrawal penalty tax.

In most cases, all or part of any traditional IRA withdrawal will count as taxable income. The taxable percentage depends on whether you ve made any nondeductible contributions over the years. While it may be impossible to avoid an income tax hit from taking an early withdrawal, you might be able to avoid the 10% penalty tax by taking advantage of several exceptions. Here s a list of them along with brief explanations.

Substantially Equal Periodic Payments (SEPPs)

SEPPs are annuity-like IRA withdrawals that you must take at least annually. There are three different methods for calculating them. One is relatively simple; the other two are complicated. The amount of the penalty-free SEPP that you can take each year can vary by thousands depending on which method you choose.

You must continue taking SEPPs from the annuitized account for at least five years or until age 59 1/2, whichever comes later. If you don t stick with the program, the taxable portion of all pre-age-59 1/2 withdrawals from the annuitized account can be hit with the 10% penalty tax. Ditto if you take more or less than the annual SEPP amount from the annuitized account. That s why I recommend seeking advice from a tax pro before embarking on a SEPP program that would involve substantial dollars.

Withdrawals to Cover Medical Expenses

If you pay medical expenses that exceed 7.5% of your adjusted gross income (AGI) for the year, you can take penalty-free early IRA withdrawals up to the excess amount.

Withdrawals to Cover Higher Education Expenses

Early IRA withdrawals are penalty-free to the extent you pay qualified higher education expenses during the year. The expenses must be for your education or for your spouse, child, stepchild, or your or your spouse's adopted child.

Withdrawals to Cover Health Insurance Premiums While Unemployed

This exception is limited to those who receive unemployment compensation for 12 consecutive weeks under any federal or state unemployment compensation law during the current year or the preceding year. Early IRA withdrawals taken during the current year are penalty-free when they're used to pay for health insurance premiums for yourself, your spouse or your dependents. However, early withdrawals taken after regaining employment for at least 60 days don t qualify for penalty-free treatment.

Withdrawals After Disability

Early IRA withdrawals taken by an account owner who is physically or mentally disabled to the extent that he or she cannot work in his or her usual job or business activity or a similar job or business activity are exempt from the 10% penalty tax. The disability must be expected to be of long or indefinite duration (although it need not be permanent) or lead to death.

Withdrawals to Cover First-Time Home Purchase

Subject to a $10,000 lifetime limit, you can take penalty-free early IRA withdrawals to cover amounts spent within 120 days on qualified home acquisition costs. The home must be a principal residence acquired by you, your spouse, child, grandchild, or grandparent (or your spouse s child, grandchild, or grandparent). The buyer (and spouse if applicable) must not have owned a principal residence within the two-year period ending on the home acquisition date.

Withdrawals to Satisfy IRS Levies

Early IRA withdrawals taken by the IRS to pay federal tax levies against the IRA itself (as opposed to levies against the account owner) are exempt from the 10% penalty tax. Gee thanks!

Withdrawals by Military Reservists

Qualified early withdrawals taken by military reserve members called to active duty for at least 180 days or for an indefinite period are exempt from the 10% penalty tax.

Withdrawals after Death

Amounts paid to a deceased IRA owner s estate or account beneficiary after the account owner s death are exempt from the 10% penalty tax.

The Bottom Line

If you must take IRA withdrawals before age 59 1/2, the tax planning goal is to avoid the 10% penalty tax. As you can see, there are various penalty tax exceptions for the taking, and they can save your bacon. For more details, go to www.irs.gov and check out Publication 590 (Individual Retirement Arrangements).

Oddly enough, some of the penalty tax exceptions for IRAs are not available for early withdrawals from qualified retirement plan accounts, such as 401(k) accounts. Additional considerations apply to Roth IRAs. So I may have more about early withdrawals in future columns. Stay tuned!