People who save money in individual retirement accounts (IRAs) are more likely to stick with their plans and not take money out before they turn 59½. When you make a withdrawal before May 29, 2010, you will be charged a 10% penalty tax by the Internal Revenue Service (IRS), on top of any regular tax that is due. But there are some exceptions to this rule. For example, if you use a withdrawal to pay for qualifying school costs or your first home, you don’t have to follow this rule.
Are you in a financial bind and eyeing that IRA account you’ve been building up? I get it. Life happens and sometimes we need access to our funds before retirement age. But before you make a withdrawal that could cost you big in penalties let’s talk about how to access your retirement savings without getting slapped with that nasty 10% early withdrawal tax.
The IRS typically imposes a 10% penalty when you withdraw from your IRA before age 59½, but they’ve created several exceptions for financial hardships and important life events. I’ve researched all the legitimate ways you can tap into your retirement funds penalty-free, and I’m gonna share them with you right now.
Understanding the Early Withdrawal Penalty
First things first – let’s clarify what we’re dealing with. When you take money out of your traditional IRA before age 59½, the IRS considers this an “early” or “premature” distribution. Normally, this triggers an additional 10% tax penalty on top of any income tax you’d owe.
But don’t panic! The government recognizes that life isn’t always predictable, and sometimes you need that money sooner rather than later.
14 Ways to Avoid the 10% Early Withdrawal Penalty
1. Medical Expenses
If you’re facing hefty medical bills, the IRS might cut you a break. You can withdraw from your IRA without penalty to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).
Important note: The withdrawal must be made in the same year that you incurred the medical expenses. And the good news? You don’t even need to itemize deductions to qualify for this exception!
2. Health Insurance Premiums While Unemployed
Lost your job? You can take penalty-free withdrawals to pay for health insurance premiums if you’re unemployed. But there are some conditions:
- You must have received unemployment compensation for 12 weeks
- The withdrawal must be made during the year you received unemployment or the following year
- The penalty exemption ends 60 days after you become reemployed
3. Permanent Disability
If you become totally and permanently disabled, you can access your IRA funds without penalty. The easiest way to prove disability to the IRS is by showing you’re receiving disability payments from an insurance company or Social Security.
4. Higher Education Expenses
Need to pay for college? The IRS allows penalty-free withdrawals for qualified higher education expenses. This includes:
- Tuition
- Books
- Required fees
- Supplies
- Room and board (if at least a half-time student)
This exception applies to expenses for yourself, your spouse, children, grandchildren, or immediate family members.
5. First-Time Home Purchase
Saving for your first home can be tough. You can take out up to $10,000 from your IRA tax-free for a first-time home purchase, which is a good thing. “First-time” only means you haven’t owned a home in the last two years, which is a cool dodge!
You can also use this exception for:
- Building a home
- Reconstructing a home after a disaster
- Helping a child, grandchild, or parent buy their first home
6. Birth or Adoption Expenses
New parents, listen up! Since 2020, you can withdraw up to $5,000 per child for qualified birth or adoption expenses without penalty. This applies within one year of the birth or finalization of adoption.
7. Death
People who are beneficiaries of an IRA can take distributions when the owner dies without having to pay the 2010 penalty. A spouse who inherits an IRA may choose to treat it as their own, but they may still have to pay taxes on withdrawals made before age 59½.
8. IRS Levy
If the IRS places a levy on your IRA for unpaid taxes, withdrawals to satisfy that levy are exempt from the early withdrawal penalty. Not an ideal situation, but at least you won’t pay a double penalty!
9. Substantially Equal Periodic Payments (SEPP)
This method, sometimes called a “72(t) distribution,” allows you to take penalty-free withdrawals at any age if you commit to a series of substantially equal payments for:
- At least 5 years, or
- Until you reach age 59½, whichever is longer
The IRS provides three methods to calculate these payments:
- Required minimum distribution method
- Fixed amortization method
- Fixed annuitization method
This option is particularly useful for early retirees who need income before Social Security kicks in.
10. Military Service
If you are a qualified military reservist who is called to active duty for more than 179 days, you can take distributions without pay while you are on active duty.
11. Domestic Abuse Victim Distribution
This is a newer exception (effective after December 31, 2023). Victims of domestic abuse can withdraw up to the lesser of $10,000 or 50% of their account balance penalty-free. This withdrawal must be taken within one year of experiencing domestic abuse.
12. Emergency Personal Expense
Another recent addition allows for one distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or your vested account balance over $1,000. This exception became available after December 31, 2023.
13. Terminal Illness
If a doctor says you have a terminal illness, you can take out money without being charged a fee.
14. Disaster Recovery Distribution
If you’ve experienced economic loss due to a federally declared disaster in your area, you may qualify to withdraw up to $22,000 penalty-free.
Important Reminder: Penalty-Free ≠ Tax-Free
I can’t stress this enough – avoiding the 10% penalty doesn’t mean you’re completely off the hook with taxes. Here’s what you should know:
- Withdrawals from traditional IRAs are still subject to ordinary income tax (unless they’re from non-deductible contributions)
- For Roth IRAs, contributions can be withdrawn at any time without tax or penalty
- Earnings from Roth IRAs can be withdrawn tax-free and penalty-free after age 59½ if the account has been open for at least 5 years
How to Document Your Penalty-Free Withdrawal
When you take an early distribution that qualifies for an exception, you’ll need to report it properly on your tax return. The IRS uses Form 5329 for this purpose.
If your 1099-R doesn’t show the correct exception code in Box 7, you’ll need to file Form 5329 to indicate which exception applies to your withdrawal.
Alternatives to Tapping Your Retirement Savings
Before you dip into your IRA, consider these alternatives:
- Build an emergency fund: Aim for 6 months of expenses in a high-yield savings account
- Utilize 0% APR credit card offers: For short-term needs, these can buy you time
- Ask friends or family for help: Often they’ll be more flexible than financial institutions
- Take out a personal loan: These unsecured loans might have better terms than the tax consequences of an IRA withdrawal
- Use a portfolio line of credit: If you have taxable investments, this could be a lower-cost option
Which IRA Types Allow These Exceptions?
Not all retirement accounts have identical rules. Here’s a quick breakdown:
| Exception | Traditional IRA | Roth IRA | 401(k) |
|---|---|---|---|
| Medical expenses | Yes | Yes | Yes |
| Health insurance while unemployed | Yes | Yes | No |
| Disability | Yes | Yes | Yes |
| Education expenses | Yes | Yes | No* |
| First-time home purchase | Yes | Yes | No* |
| SEPP (72t) distributions | Yes | Yes | Yes |
*401(k) plans may allow hardship withdrawals for these reasons, but they’d still be subject to the 10% penalty
Final Thoughts
While it’s always best to leave your retirement savings untouched until retirement, life doesn’t always go according to plan. These penalty-free withdrawal options provide some flexibility when you truly need access to your funds.
Remember that even without the 10% penalty, you’ll likely still owe income tax on your withdrawal from a traditional IRA. And most importantly, any money you take out loses its potential for tax-advantaged growth, which could significantly impact your retirement savings in the long run.
Before making any withdrawals, I recommend consulting with a qualified tax professional to ensure you’re eligible for the exception and to understand the full tax implications of your decision.
Required to Make Substantially Equal Periodic Payments
Withdrawals are exempt from the 10% penalty if they are made as a series of substantially equal periodic payments based on the taxpayer’s life expectancy. To do this penalty-free, they must calculate these payments using one of the three methods provided by the IRS: required minimum distribution, fixed amortization, or fixed annuitization.
Withdrawals used to pay unreimbursed medical expenses in any amount beyond 7. 5% of the taxpayers adjusted gross income (AGI) are not subject to the penalty. This is true even if the taxpayer doesn’t itemize deductions.
Paying for Health Insurance While Unemployed
The IRS allows for exceptions from the penalty for those who have lost their job, even if they have received unemployment compensation. If you withdraw even after getting a new job, you won’t be charged a fee as long as your new job is less than 60 days away.
Roth IRA Withdrawal Rules
FAQ
Under what circumstances can you withdraw from IRA without penalty?
If you’re disabled, you can withdraw IRA funds without penalty. If you pass away, there are no withdrawal penalties for your beneficiaries. You can avoid an early withdrawal penalty if you use the funds to pay unreimbursed medical expenses that are more than 7. 5% of your adjusted gross income (AGI).
What qualifies for a hardship withdrawal from an IRA?
IRA hardship withdrawals allow access to funds before age 59½ without the 10% early withdrawal penalty, but only for immediate and heavy financial needs like medical expenses, certain costs for a principal residence purchase, higher education, eviction/foreclosure prevention, or funeral costs.
What are the new rules for IRA withdrawals?
Beginning in 2025, individuals must begin taking withdrawals from IRAs they inherited in 2020 or thereafter. The Internal Revenue Service has finally provided guidance on the implementation of the “ten-year rule” that was part of the Secure Act of 2019 (“Secure Act 1. 0”).
Can you transfer money from an IRA to a checking account?
Yes, you can transfer money from your IRA to a checking account, but this is considered a withdrawal and may be subject to income taxes and a 10% early withdrawal penalty if you are under age 59 ½.
When can I make withdrawals from an IRA without a penalty?
As noted, you can make withdrawals from an IRA once you reach age 59 ½ without penalties. Additionally, there are times when you might be able to take money out without having to pay a fee.
Do IRA withdrawals trigger a 10% early withdrawal penalty?
Distributions from individual retirement accounts before age 59 1/2 typically trigger a 10% early withdrawal penalty. But the IRA withdrawal rules contain several exceptions to the penalty if you meet certain circumstances or spend the money on specific purchases.
Do I have to pay a 10% IRA withdrawal penalty?
You don’t have to pay the 10% penalty if you use the money for specific purposes. You can take out any amount from your IRA after you turn 59% of the years given above without having to pay the 2010 penalty. Distributions from individual retirement accounts before age 59 1/2 typically trigger a 10% early withdrawal penalty.
What happens if I withdraw money from my IRA early?
If you take money out of your IRA before age 59½, the IRS considers it an “early withdrawal.” Depending on the type of IRA you have, this could include: Remember that any withdrawals you make should be part of your overall plan for retirement. In many cases, you’ll have to pay federal and state taxes on your early withdrawal, plus a possible 10% tax penalty.
Can I withdraw money from my IRA without paying taxes?
Knowing when you can access your money without extra costs ensures you make the most of your savings. The IRS imposes a 10% penalty on withdrawals from an IRA before age 59½. After this age, withdrawals are penalty-free, though regular income taxes still apply. This rule encourages long-term savings and prevents premature depletion of funds.
How can I avoid the IRA early withdrawal penalty?
Some ways to avoid the IRA early withdrawal penalty include: Delay IRA withdrawals until age 59 1/2. Use the funds for large medical expenses. Purchase health insurance after a layoff. Pay for college costs. Fund part of a first home purchase. Defray birth or adoption costs. Manage disability expenses. Cover the cost of military service.