11 Ways to Avoid the IRA Early Withdrawal Penalty

If you have college, medical or first-home bills, you may be able to take penalty-free IRA distributions.

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Set up an annuity. You can set up a series of annuity payments from your IRA without incurring the early withdrawal penalty. You must use an IRS-approved distribution method and take at least one withdrawal annually to avoid the penalty. The payments are calculated based on your life expectancy or the joint life expectancies of you and your beneficiary, and generally require professional assistance to calculate. "You've got to continue to take the distributions for five years or until you are 59 1/2," says David Frisch, a certified financial planner for Frisch Financial Group in Melville, N.Y. "Even if you have satisfied what the need was, you still have to keep taking the money out until you are 59 1/2." If you don't calculate the payments correctly or fail to consistently withdraw the correct amount over the appropriate number of years, penalties could be applied.

Military service. There is no penalty for IRA withdrawals taken by members of the military reserves, including the Army Reserve, Naval Reserve, Marine Corps Reserve and Air National Guard, who were called to active duty after Sept. 11, 2001, for a period of more than 179 days or an indefinite period. The distribution must be taken during the active duty period to avoid the penalty.

Withdraw from a Roth IRA. If you have a Roth IRA that is at least five years old, you may be able to withdraw your contributions, but not the earnings, without incurring an early withdrawal penalty.

[Read: Why You Should Open a Roth IRA.]

Leave the money in a 401(k). Employees who leave their jobs in the year they turn 55 or older can make 401(k) withdrawals for any reason without having to pay the 10 percent early withdrawal penalty. But if you roll the money over to an IRA, you'll have to wait until 59 1/2 to avoid the penalty. "If you have retired after 55 and prior to 59 1/2, you might want to think hard before rolling over that 401(k) plan to an IRA because there are some opportunities there prior to rolling that money to an IRA to get penalty-free withdrawals," Campbell says.