10 Ways to Tap Your IRA Early Without Penalty

There are a variety of ways to access your retirement savings before age 59½.

By + More

Sometimes an emergency expense comes up and you need access to your IRA account before retirement. But when you take money out of your IRA before age 59½, you usually have to pay income tax and a 10 percent early withdrawal penalty on the amount withdrawn. While you generally can't evade income tax on traditional IRA withdrawals, you can avoid the early withdrawal penalty if the money taken out of your IRA is for an Uncle Sam-sanctioned reason. Here are 10 ways to avoid the 10 percent penalty on early IRA withdrawals.

Large medical bills. You won't have to pay the early withdrawal penalty if you use the distribution to pay for unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income. "You have to keep track of receipts for all your medical expenses to make sure that you qualify for the exemption," says Bruce Hosler, a certified financial planner and founder of Hosler Wealth Management in Prescott, Ariz.

[See 10 Costs That Could Increase in Retirement.]

Health insurance. If you lose your job and collect federal or state unemployment compensation for at least 12 consecutive weeks, you can use IRA withdrawals to pay for medical insurance for yourself, your spouse, and your dependents without penalty. To qualify for the exemption, the distribution must be taken during the year you received the unemployment compensation or the following year, and no later than 60 days after you have been reemployed.

College costs. Withdrawals used to pay for higher education expenses for you, your spouse, and the children or grandchildren of you or your spouse are not subject to the 10 percent tax. Qualifying higher education expenses include tuition, fees, books, supplies, and equipment required for college attendance. Room and board costs also qualify if the individual is at least a half-time student. However, IRA withdrawals still count as income and could impact your child's eligibility for financial aid.

A first home. You do not have to pay the 10 percent tax on IRA withdrawals of up to $10,000 that are used to buy, build, or rebuild a first home. And if both you and your spouse are first-time homebuyers, the limit doubles to $20,000. To qualify, the distribution must be spent on acquisition costs for a house for you, your spouse, or either of your children, grandchildren, parents, or other ancestor within 120 days of the distribution. But you can't use your IRA to help each of these people buy a first home. "There's a lifetime cap of $10,000 for each IRA owner," says Linda Gardner, a certified public accountant and co-owner of Blue Heron Capital in Englewood, Colo. You are considered a first-time homebuyer if you had no interest in a main home during the two-year period before the new home was acquired. If your new home purchase falls through or becomes delayed, you must put the money back in your IRA within 120 days of the distribution to avoid the tax.

Annuity payments. You can receive early distributions from your traditional IRA without incurring the 10 percent tax if they are part of a series of substantially equal payments over your life expectancy or the joint life expectancies of you and a beneficiary. You must use an IRS-approved distribution method and take at least one distribution annually for this exception to apply. "You have to make sure that somebody calculates the right amount and that you take that exact amount every year," says Hosler. "If someone takes more or less, then all those pervious withdrawals all become subject to the 10 percent penalty." However, you don't need to set up annuity payments based on your entire account balance. "You may want to consider splitting the account and only taking payments out of one of them," says Gardner.

[See 10 Reasons to Open a Roth IRA.]

Disability. Retirement savers who become disabled before age 59½ may take penalty-free distributions from a traditional IRA. However, you may be required to furnish proof from a physician that your permanent physical or mental condition prohibits you from doing any substantial gainful activity.