You can take money from a traditional IRA penalty-free at any age if you follow certain rules. By Kimberly Lankford, Contributing Editor November 3, 2011 I’m 56 years old and about to retire. Is there a way to withdraw money from my 401(k) and traditional IRA without paying the 10% penalty for withdrawals before age 59½? -- M.C., Kettering, OhioYou’re in luck. Because you will be older than 55 when you leave your job, you can take penalty-free withdrawals from your 401(k) plan (the distributions will still be subject to income taxes). And you can take money from a traditional IRA penalty-free at any age as long as you follow certain rules. These early-out payments are known as 72(t) distributions, named for the section of the tax code that authorizes them. The provision allows you to take “substantially equal” distributions for at least five years or until age 59½, whichever is longer. If you have several IRAs, you can choose to take distributions from just one account. Or, if you have only one IRA, you can split off a portion into a new IRA to satisfy your early-distribution needs and let the remainder continue to grow tax-deferred. Try the free calculator to estimate how much you can withdraw under three different distribution methods. You can even work the numbers in reverse: Start with how much you would like to withdraw each year and you can see how much you need in an IRA to satisfy the withdrawal schedule. But there’s a big penalty if you deviate from the distribution schedule: You will owe the 10% withdrawal penalty retroactively on all your withdrawals. Advertisement Tax-free gifts I want to give my granddaughter $13,000 this year. Do I need to pay gift taxes or document this gift on my tax return? -- T.P., Owasso, Okla. You don’t need to do anything as long as you limit your generosity to your granddaughter to $13,000 or less this year. That’s the magic number for triggering a gift-tax return. In fact, you can give up to $13,000 to as many people as you want in 2011 without filing a gift-tax return. If you want to be even more generous, you can contribute up to $65,000 to a 529 college savings plan for your granddaughter and spread the contribution over five years tax-free, but you must file a gift tax Form 709 to document the spread. Giving gifts during your lifetime permanently removes money or other assets from your estate, reducing any future estate tax -- something most people never have to worry about. Under current law, in effect through 2012, only estates worth more than $5 million ($10 million for married couples) would be subject to federal estate and gift taxes. Advertisement Last-minute Roth conversion I retired this year. Would this be a good time to convert my traditional IRA to a Roth? -- T.R., Woodridge, Ill. It could be a good time to convert to a Roth IRA, particularly if your income is lower than usual and your income-tax bracket has dropped. The key is whether you have enough money on hand -- preferably not inside your IRA -- to pay the tax on the conversion when you file your 2011 tax return next year. There was a lot of hoopla last year about converting traditional IRAs to Roth IRAs because in 2010 you could spread the tax bill over two years. But the two-year spread is no longer an option. If you convert to a Roth IRA by December 31, you’ll need to pay taxes on the entire amount when you file your 2011 return next April. But your decision doesn’t have to be all or nothing. You may want to convert only a portion of your IRA each year so that you don’t boost your adjusted gross income too much in any one year. A higher AGI could jeopardize your eligibility for other tax breaks or could subject you to the high-income surcharge for Medicare Part B and Part D. That surcharge kicks in after your AGI tops $85,000 for single filers and $170,000 for married couples filing jointly. Got a question? Ask Kim.