11 Legit IRA Early Withdrawal Options (With No Penalties)

You’ve been diligently contributing to your IRA for a secure retirement. But what if an unexpected financial crisis hits before you reach retirement age, and you need to supplement your income?

Tapping into your IRA might seem tempting, but there are strict IRS rules to consider. Generally, withdrawals before age 59 1/2 incur a 10% penalty on top of income taxes.

However, there are exceptions. In this article, we explore 11 situations where you can access your IRA funds penalty-free.

If you become permanently disabled before age 59 1/2, you can start withdrawing funds from your traditional IRA without paying a 10% tax. You’ll likely need to provide medical records that document and verify your permanent disability. 

As with all withdrawals, you’ll report the withdrawal amount as income on your taxes.

If your insurance plan doesn’t cover certain costly medical expenses (or if you don’t have health insurance to begin with), you can withdraw IRA money to cover these bills. However, there are a few caveats.

First, you have to pay the medical bills during the same calendar year in which you withdraw the funds. Second, you’re only exempt from the 10% tax on withdrawals that cover medical expenses totaling more than 7.5% of your adjusted gross income (AGI).

Health insurance premiums are expensive, especially if you’re unemployed and your employer doesn’t pay a portion of the premium. 

If you lose your job and need to pay an out-of-pocket premium for your household’s health insurance, you can make a fee-free IRA withdrawal to cover the cost.

Struggling to pay for college, either for yourself, your spouse, or one of your dependents? You might be able to make a withdrawal that pays for certain expenses without incurring the 10% early withdrawal tax.

However, only a certain portion of a withdrawal made for college expenses is tax-free. Consult IRS Publication 970 or meet with a tax professional to understand how much of your education-related early withdrawal will be taxed.

For a full year after a child’s birth or adoption, you can withdraw up to $5,000 from your IRA without paying the 10% tax. Married? Your partner can withdraw $5,000, tax-free, from their own IRA as well.

If you’re buying or building your first home, you can withdraw up to $10,000 from your IRA to contribute toward costs. If you’re married, your spouse can also withdraw $10,000 from their own IRA without paying an early withdrawal tax.

Note that from the IRS’s perspective, anyone who hasn’t owned a home for the previous two years is a first-time homebuyer. So, even if you aren’t technically a first-time buyer, you might still qualify for a tax-exempt withdrawal.

Individuals in the National Guard and other military reservists may be called to active duty in the military at any time. If they are, qualified reservists can withdraw money from their IRA without paying a 10% withdrawal tax.

However, you must be on active duty for at least 179 days to qualify. Plus, you can’t withdraw funds before you deploy or after you return and expect to avoid the 10% tax. Instead, you must take money out of your account while actively serving.

If you receive a diagnosis of a terminal illness, you’re allowed to start making early withdrawals from certain retirement funds, including 401(k)s, without paying a 10% withdrawal tax. 

In this case, a “terminal illness” refers to a disease that a qualified physician believes will end in death within roughly seven years (84 months).

In some cases, the IRS can levy money directly from your IRA to pay the federal taxes you owe. In this case, you don’t need to (and shouldn’t) withdraw those tax repayment funds yourself.

The IRS imposes the levy itself and withdraws funds directly, but if you withdraw money with the intent to pay the IRS, you’ll pay the 10% early-withdrawal tax.

If you’re the victim of domestic abuse, either by a married spouse or a domestic partner, a new law lets you withdraw up to $10,000 tax-free from your IRA. You need to make the withdrawal within a year of the domestic abuse incident.

The Federal Emergency Management Agency (FEMA) might declare a disaster in your area in the case of a devastating wildfire, earthquake, hurricane, or other natural disaster. 

If you experience financial hardship as a result of one of these events, you can likely withdraw as much as $22,000 from your IRA without paying the 10% tax. However, you will have to meet eligibility requirements for disaster relief.

Tapping into your retirement savings should be a last resort. If you're facing financial hardship, explore all other options first, such as cutting back on expenses or seeking temporary employment. 

Remember, withdrawing funds from your IRA means sacrificing potential future growth and could impact your ability to have a stress-free retirement.