A premature IRA distribution occurs when you take money from your IRA before reaching age 59½. If you are under 59½ and withdraw funds from your IRA, you'll probably have to pay a 10 percent penalty tax on top of whatever income taxes you owe on the distribution. This can be a major drawback for IRA owners who need money and have few other assets to draw on. There are a number of exceptions to this rule, however. You may qualify under one of these exceptions to make penalty-free IRA withdrawals.

Premature IRA withdrawals made by a disabled person may be exempt from the penalty. If an IRA owner dies before reaching age 59½, distributions paid to you as a beneficiary are not subject to the penalty. If you need supplementary income, you can take IRA distributions as a series of "substantially equal payments" over your life expectancy or the joint life expectancy of you and your beneficiary. These distributions will avoid the penalty as long as you don't modify the payments within certain time frames.

Subject to limits and conditions, the penalty tax generally will not apply to IRA distributions taken to pay qualifying medical expenses, health insurance premiums while you're unemployed, higher education costs, first-time home-buyer expenses, and qualified reservist distributions. The penalty tax also does not apply to amounts rolled over from one IRA to another (assuming you follow the rules for rollovers), or to amounts that the IRS levies from your IRA to cover your tax bill.

Other exceptions may also apply. Finally, Roth IRAs may be subject to special rules of their own.