Let’s get one very important thing out of the way at the outset, and it’s that the money and investments in your IRA are always completely owned by you. You are never locked out from your account, and you’re not prohibited from withdrawing your money at any time. However, if you take a distribution from an IRA before you reach age 59½, then you’ll have to pay a financial penalty to the IRA for doing so. That’s one of the trade-offs for being able to make contributions for a tax-advantaged account in the first place.
So one option for taking an early distribution from your account, albeit one that’s very expensive and potentially damaging to your retirement security, is simply to take the distribution and pay the 10% IRS penalty for doing so. This gives you access to your money, but permanently impacts the ability of your account to grow, because you’re not allowed to later replace the funds you take out of your account.
However, if you need early access to your funds then you may be able to use one of the limited exceptions that allow certain types of penalty-free distributions. Just remember that if your IRA is set up as a traditional account (as opposed to a Roth), then you’ll still have to pay whatever taxes are otherwise due upon the distribution.
Qualified Medical Expenses. You are permitted to take a penalty-free early distribution from your self-directed IRA in order to pay for unreimbursed medical expenses, where such expenses exceed 10% of your adjusted annual gross income. However, the permissible amount of the penalty distribution is not the full amount of such expenses, but the amount of that is in excess of 10% of your AGI.
Furthermore, in certain instances where you find yourself unemployed for a long period of time, you may also be able to take penalty-free distributions from your account to pay your health insurance premiums.
Qualified Educational Expenses. Another important option for taking early distributions from your self-directed IRA is for qualified educational expenses. This exemption from the early distribution penalty provisions allows you to withdraw funds from your account to pay for certain higher education expenses for yourself, your spouse, or your children or grandchildren. The expenses must relate directly to attendance at a school or institution that is eligible for federal financial aid programs (which means that certain types of trade and professional schools may not apply).
Assistance for First-Time Homebuyers. If you’re a first time homebuyer, then you’re permitted to take a penalty-free distribution of up to $10,000 from your IRA in order to help pay for the down payment and other closing costs. You may also use this exemption to help your children or grandchildren. And it’s important to note that the definition of “first time” homebuyer merely requires that you not have owned your primary residence for at least the last two years.
Again, however, you should try to avoid taking early distributions from your self-directed IRA wherever possible. Given the opportunities for growth that you’re giving up when you take an early distribution from your account, it’s worth considering all of your other options before taking those funds.