Exceptions to the IRA Early Withdrawal Penalty

You might have hit a rough patch financially, or need an extra boost for a big expense, and remember that you have more than enough in your retirement account to pull from for an emergency. The only problem is you haven’t turned 59 ½ yet, so any money withdrawn from your IRA will incur a 10% penalty. Ouch. Luckily, there are a few exceptions to this penalty rule, and you may qualify for at least one of them. Read on to find out when you can accept an early distribution without suffering a stiff penalty for doing so.

  • Education. The IRS allows early withdrawals from an IRA to pay for college tuition, fees, and supplies. They even allow the distribution to be used on room and board as long as the student is at least half-time. The person using the money for education must be you, your spouse, your child, your grandchild, or your parent. One thing to keep in mind when using this method is that any extra income from the IRA may affect your financial aid eligibility.
  • Medical. If you are unlucky enough to need an expensive medical procedure performed that costs more than 10% of your adjusted gross income, you are allowed an early withdrawal to help pay for the expense. The catch is that the expense must not be reimbursed in any way by your insurance company.Another medical related category you may use your IRA money for is toward health insurance if you have been out of work for at least 12 weeks and have been collecting unemployment. The health insurance must be for you, your spouse, and/or your children.
  • Home purchase. If you are a first-time home buyer or haven’t owned a home within the last two years, you may use money from an IRA to use toward buying a home, building or rebuilding a home, for settling, financing, and/or closing costs. The money can also be used by you, a spouse, a child, grandchild, or parent, and must be used within 120 days of withdrawal. A single person can withdraw $10,000 without penalty, and a married couple $20,000 from their combined IRAs.
  • Military. Anybody in the military reserves who has been called into active duty for at least 180 days may take an early withdrawal without penalty. However, they may not take the withdrawal before their orders were given or after their active duty status ends.
  • Disability. A work-ending physical or mental disability will qualify you for an early distribution as long as a physician confirms the disability will result in either death or a continued or indefinite duration. There are no requirements as to what the money may be used for.
  • Death. If an IRA holder suddenly dies, a spouse, child, or other named trustee may make an early withdrawal as long as they claim it as an inherited IRA and refrain from rolling over the account into their own IRA.
    Substantially Equal Periodic Payments. If you’re really in a financial bind and need to use your retirement money for an extended amount of time, the IRS will waive the 10% penalty as long as certain criteria are met. You must take the same amount of money out each time, in which the amount is determined by any one of three IRS methods, for a period of 5 years or until you turn 59 ½, whichever comes later. If you fail to meet these criteria, you may owe 10% on each withdrawal taken.

It’s best to leave IRA funds untouched until you reach age 59 ½ to ensure you have enough to live comfortably at retirement. However, extenuating life circumstances may cause adaptations to the plan. Although the above mentioned exemptions will save you from the 10% early withdrawal fee, you will still have to pay income tax on any funds received from a traditional IRA since all contributions were made tax deferred. With a Roth IRA, you are allowed to make tax-free withdrawals at any time as long as the account is at least five years old and you are withdrawing on contributions only, but not earnings. Remember to always fill out your tax forms correctly to let the IRS know the funds were used under an exempted reason, and always know the rules and limitations of your own IRA.