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Jean Folger has 15+ years of experience as a financial writer covering real estate, investing, active trading, the economy, and retirement planning. She is the co-founder of PowerZone Trading, a company that has provided programming, consulting, and strategy development services to active traders and investors since 2004.
Updated June 05, 2024 Fact checked by Fact checked by Jane MeachamJane Meacham has nearly 40 years' experience researching, writing, and editing financial content. She previously worked at Dow Jones & Co. in the U.S. and Asia, and is certified in Global Reporting Initiative (GRI) Standards.
The contributions that you make to your individual retirement account (IRA) are intended to supplement your income during your retirement years. However, as much as you would like to let your IRAs remain untouched until retirement, unforeseen expenses may force you to withdraw some of those assets early.
Traditional and Roth IRA distributions can trigger a 10% penalty if you take them too soon, but there are early withdrawal exceptions that let you skip the fine.
If you’re looking for a tax-advantaged way to save for retirement, a traditional IRA may fit the bill. Traditional IRAs provide an up-front tax break. You can deduct your contributions in the year when you make them, as long as you meet income guidelines. However, you’ll pay income taxes on withdrawals during retirement at your then-current tax rate.
With a Roth IRA, contributions are made with after-tax dollars. That means you won’t get any tax savings when you add money to your account. But withdrawals after age 59½ are 100% tax-free and penalty-free, provided it has been at least five years since you first contributed to a Roth. As an added bonus, you can withdraw your contributions (but not the earnings on those contributions) whenever you like, without tax or penalty.
The Internal Revenue Service (IRS) imposes a 10% penalty on early IRA withdrawals to encourage you to keep your retirement savings intact.
However, you may be able to avoid the penalty in certain situations. Here are nine instances in which you can take an early withdrawal from a traditional or Roth IRA without being penalized. (Note that you can withdraw your contributions to a Roth IRA without penalty at any time, but not your contributions to a traditional IRA.)
If you don’t have health insurance or you have out-of-pocket medical expenses that aren’t covered by insurance, you may be able to take penalty-free distributions from your IRA to cover these expenses.
To qualify, you must pay the medical expenses during the same calendar year when you make the withdrawal. Also, your unreimbursed medical expenses must exceed 7.5% of your adjusted gross income (AGI).
For example, if your AGI is $100,000 and your unreimbursed medical expenses are $15,000, then the most that you can distribute penalty-free is $7,500—the difference between $15,000 and 7.5% of your AGI ($7,500).
If you’re unemployed, you may take penalty-free distributions from your IRA to pay for health insurance premiums. For the distribution to be eligible for the penalty-free treatment, you must meet certain conditions:
If you become permanently disabled and can no longer work, the IRS lets you withdraw money from your IRA without paying the 10% penalty. You can use the distribution for any purpose. Just be aware that your plan administrator may require you to provide proof of the disability before signing off on a penalty-free withdrawal.
A college degree is pricey these days. If you’re footing the bill for education expenses, then your IRA may be a valuable source of funding. It’s possible to avoid the 10% penalty when you use IRA assets to pay for qualified higher education expenses for you, your spouse, or the child or grandchild of you or your spouse.
Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment. Room and board are also covered for students who are enrolled at least half-time. Moreover, the IRS has specific rules about tax benefits and calculating how much isn't subject to the 10% penalty.
Be sure to consult with a trusted tax professional to determine whether your higher education expenses qualify. Also, check with the school to make sure it satisfies the requirements that allow for penalty-free IRA withdrawals.
If you’re the beneficiary of an IRA, your withdrawals aren’t subject to the 10% early withdrawal penalty.
This exception doesn’t apply if you’re the spouse of the original account holder, you’re the sole beneficiary, and you elect a spousal transfer (by which you roll over the funds into your own non-inherited IRA). In this case, the IRA is treated as if it were yours to begin with. That means the 10% early withdrawal penalties still apply.
Your IRA provider should report the amount that you withdraw as a death distribution by including Code “4” in Box 7 of IRS Form 1099-R, the form used to report the distribution. Check with your IRA custodian/trustee regarding what documentation you’ll need to process your transaction.
You can withdraw up to $10,000 (that’s a lifetime limit) from your IRA without penalty to buy, build, or rebuild a home. To qualify, you must be a first-time homebuyer—in this case, meaning that you haven’t owned a home in the previous two years. With this interpretation by the IRS, you could have been a homeowner in the past and still qualify as a first-time homebuyer today.
If you’re married, your spouse can kick in an extra $10,000 from their IRA. Also, you can use the money to help out a child, grandchild, or parent with a home purchase or construction, provided that they meet the first-time homebuyer definition.
If you need to make regular withdrawals from your IRA for a few years, the IRS allows you to do so penalty-free if you meet certain requirements.
Basically, you withdraw the same amount—determined under one of three IRS pre-approved methods—each year for five years or until you turn age 59½, whichever comes later. This is referred to as taking substantially equal periodic payments (SEPPs) from your IRA.
If you have unpaid federal taxes, the IRS can draw on your IRA to pay the bill. The 10% penalty won’t apply if the IRS levies the money directly. However, you can’t withdraw the money to pay the taxes to avoid the levy. In this case, the exception wouldn’t apply, and you would be on the hook for the 10% penalty.
Qualified reservist distributions aren't subject to the 10% penalty. In general, these are distributions made to a military reservist or National Guard member who is called to active duty for at least 179 days after Sept. 11, 2001.
In some cases, you may be able to repay the distributions, even if the repayment contributions exceed annual contribution limits. However, you must do so within two years of the end of active duty.
Yes. A legal adoption or the birth of a child is considered an exemption, too. You can use funds from your IRA penalty-free for an adoption. If you adopt (or give birth to) a child, you can withdraw funds from your IRA if it’s within the first year after the date when the adoption was finalized (or the baby’s birth date). The maximum amount that you can withdraw is $5,000 per adoption or birth.
You won’t have to pay a penalty on withdrawals of either contributions or earnings from a Roth IRA provided that the account has been open for at least five tax years. So, if you opened and contributed to a Roth IRA at age 66 starting in 2023, you can begin withdrawing funds without penalty in 2028.
For 2024, the contribution limit for someone over age 50 is $8,000. That involves a regular contribution of $6,500 plus a catch-up contribution of $1,000. To contribute the full amount to a Roth IRA, your modified adjusted gross income (MAGI) must be below $146,000 if you are a single filer or less than $230,000 if you are married filing jointly. As your income rises, the amount that you can contribute is reduced and eventually phased out.
Even though the cases cited above are exempt from the early distribution penalty, they still may be subject to federal and state taxes. A trusted tax professional can determine what taxes you might owe and help you to fill out the appropriate forms.
If none of the penalty-free IRA withdrawal options works for you, you may find that there are other ways to access funds, such as taking out a personal loan.
To claim the early distribution penalty exception, you may be required to file IRS Form 5329 along with your income tax return, unless your IRA custodian reports the amount as exempt on IRS Form 1099-R.
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The Roth ordering rules govern the way in which money in a Roth retirement account is withdrawn and, therefore, determine whether any taxes are due.
Net income attributable (NIA) is a tax calculation prorating the net gain or loss created by an IRA contribution that is returned or recharacterized.
A Roth IRA is a special individual retirement account (IRA) in which you pay taxes on contributions, and then all future withdrawals are tax-free.
An inherited IRA is an account that must be opened by the beneficiary of a deceased person's IRA. The tax rules are quite complicated.
A rollover IRA is an account that allows for the transfer of assets from an old employer-sponsored retirement account to a traditional IRA.
An IRA transfer is the act of moving funds from an individual retirement account (IRA) to a retirement account, brokerage account, or bank account.
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