Let's look at a tough practice question early on a Saturday morning:
Which of the following are examples of tax-free withdrawals from a Traditional Individual Retirement Arrangement for an individual 52 years of age?
I. first-time purchase of a primary residence
II. certain medical expenses
III. certain educational expenses
IV. series of substantally equal periodic payments under IRS Rule 72t
A. I, II, III
B. II, III
C. I, II, III, IV
D. none of the choices listed
Did you choose Answer C? No? Answer A? Maybe you saw the trap and chose the correct answer, which is Answer . . . D. None of the choices listed. See, the four Roman numerals given are examples of penalty-free withdrawals from an IRA, but, the more important concept is that withdrawals from your Traditional IRA are taxable. If they come out prior to age 59 1/2 they are also penalized, unless there is a provision allowing the individual to take out some money without paying that penalty. If you want to take up to $10,000 out of your IRA to buy your first residence, you will not be penalized; however, you will add the $10,000 to your taxable income for the year and pay your marginal tax rate on it. Same for the other three choices.
Not all questions are trick questions, but you need to look them over to make sure there is not a trick before proceeding.
If you would like more information on IRA's use the link below. If it doesn't work, click on the title of this post and then type in "publication 590" at the IRS website. I think the following link will take you right to the publication, though: