7 Penalty-Free Ways to Tap Your IRA Before Retirement

Here’s how to crack your nest egg before age 59½ without penalty.


When you withdraw money from your IRA before age 59½, you usually have to pay a penalty. But there are a few ways to crack your nest egg early without paying the usual 10 percent early withdrawal tax. Large medical bills, education expenses, and a first home purchase are among the Uncle Sam-sanctioned ways to spend your retirement stash.

Regular income tax, however, will still apply to your withdrawal. And, of course, you will have less money for retirement. "We generally don't encourage people to use their retirement assets for anything other than generating income in retirement," says Matt Havens, a certified financial planner and partner at Global Vision Advisors in Hingham, Mass. "Any distributions that you take from a retirement plan really interfere with the compounding process and usually have an impact later on in your retirement." Here are some penalty-free ways to tap your IRA before retirement.

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Medical expenses. If you spend more than 7.5 percent of your income on unreimbursed medical expenses, you can use your IRA to pay for healthcare above that amount without penalty. "It's a good idea when you don't have many other choices," says Carlos Lowenberg, CEO of Lowenberg Wealth Management Group in Austin. "It's better to be healthy and be able to have a retirement than not make it there."

Health insurance. Workers who lose their job and receive unemployment compensation for 12 consecutive weeks can tap their IRA to pay for medical insurance for themselves, a spouse, and dependents. "If you can't pay for your health insurance, then you would be better off taking the money out of your IRA than going to the bank and getting a loan," says Mary Rowland, author of The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From the Bottom Up.

College. IRA accounts can be used to pay for higher education expenses, such as tuition, fees, books, supplies, and required equipment. If the individual is at least a half-time student, room and board are also qualifying expenses. Eligible educational institutions include most colleges, universities, and vocational schools that accept federal financial aid. You can also use your retirement account to pay education expenses for a spouse, child, or grandchild. Most financial planners advise against it, however. "One of the greatest gifts you can give your children is to be financially independent so they don't have to pay for you later on," says Havens. Rowland, however, tapped her IRA to pay her two children's college tuition. "I could have asked my kids to drop out of college or to go to a community college, but it seemed to me to be better to take it out of the IRA," she says.

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A first home. Retirement savers can withdraw up to $10,000 from an IRA to buy, build, or rebuild a first home. If you and a spouse are both first-time home buyers, the amount increases to $20,000. Financing and closing costs are other eligible expenses. This tax loophole can also be used to purchase a first home for a parent, child, or grandchild. "I think this is a great way to use your IRA money if you only have IRA money and you haven't saved elsewhere," says Lowenberg. "You might get a better mortgage rate if you have more of a down payment."

Disability. If, before age 59½, you become disabled to the point that you cannot work, you can take penalty-free distributions from your IRA.

Annuity payments. You can receive early distributions from a traditional IRA without penalty if they are part of a series of equal payments over your lifetime or the lifetimes of a beneficiary and you. An IRS-approved distribution method must be used, and at least one withdrawal should be taken annually. "Once you start receiving distributions, you have to continue receiving those distributions for the longer of five years or age 59½," cautions Havens. "If circumstances change and you don't need the income anymore, you are still forced to take those distributions." If you don't want to set up annuity payments based on your entire account balance, you can split your IRA into two parts and base your annuity calculations on a fraction of your account balance.