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IRA Early Withdrawal Penalties and Their Exceptions

Caribbean expat, entrepreneur, and all around curious guy. One of my passions is to enable financial freedom through tax-saving innovation.

There are early withdrawal exceptions for all types of IRAs.

There are early withdrawal exceptions for all types of IRAs.

Under normal circumstances, you would never have to withdraw money from your individual retirement account (IRA) for any reason. You would live out your golden years, safe in the knowledge that you can cover any unexpected financial events in old age. But . . . this is real life. There are plenty of circumstances where an early withdrawal from you retirement account is completely warranted. In fact, according to research conducted by the financial services firm E-Trade, about 55–60% of people between the ages of 18 and 34 have already taken money out of their retirement account for some purpose.

This of course is distressing on many levels, least of which is because early withdrawal from IRAs and 401(k)s are subject to a 10% withdrawal penalty. And this penalty is on top of any taxes that these withdrawals will incur. Yet for those in the do-I-don't-I withdrawal dilemma, there's hope. The tax code allows for a number of IRA withdrawal exceptions so you can avoid the 10% penalty altogether. All exceptions are listed below with with detailed descriptions.

The Exceptions to the 10% Early Withdrawal Penalty

The 10% IRA early withdrawal penalty generally kicks in for all withdrawals taken before the account owner reaches the age of 59 1/2. However, the withdrawal exemptions generally seek to assist people in the following categories:

  1. Those with medical expenses (unreimbursed)
  2. Military reservists (called to active duty)
  3. People with higher education expenses
  4. Those purchasing their first home

You May Still Have to Pay Taxes

However, please keep in mind that these exceptions can only help you avoid the 10% penalty. These will not exempt you from any state or federal taxes that you may have to pay on these withdrawals.

IRA withdrawals due to health insurance and medical expenses may be exempt from the 10% penalty.

IRA withdrawals due to health insurance and medical expenses may be exempt from the 10% penalty.

1. Health Insurance and Medical Expenses

This category of IRA withdrawal exception allows you to do two things. You can withdraw to pay for unreimbursed medical expenses that exceed "7.5% of your adjusted gross income." Additionally, if you find yourself unemployed, you can withdraw (penalty free) in order to pay health insurance premiums for your spouse and/or children.

Let's take a few examples to see how this works in practice. Let's say you make $70,000. And you have about $7,000 in unreimbursed medical costs. You can only use $5,250 of your IRA funds to pay for those medical costs. Furthermore, for this IRA withdrawal exception to be valid, it must meet the following conditions:

  • The withdrawal must have been made 60 days prior to employment at a new job.
  • Unemployment is received by the person making the withdrawal for at least 12 consecutive weeks.
  • The IRA withdrawal is made either the same year unemployment is received or the next year.


This may actually be considered the IRA withdrawal exception with the least amount of red tape to cut through. In the case you've experienced "total and permanent disability," you can withdraw money from your IRA while avoiding the 10% penalty.

However, keep in mind that the IRA administrator (usually a bank) will probably request proof that you have a serious disability. Forms of proof that are often accepted include statements from a physician, or proof of receipt of disability payment from insurance companies or social security, etc.

IRA Withdrawal Survey

Military and national guard members called to active duty may also be exempt from the penalty.

Military and national guard members called to active duty may also be exempt from the penalty.

2. Qualified Reservist Distributions

After September 2001, military reservists or national guard members are able to withdraw from IRA accounts while avoiding the 10% penalty under the following conditions.

  • If you are called to active duty for at at least 180 days.

As an additional bonus, some institutions allow you to put withdrawals back in your account in amounts exceeding the annual contribution limit. Yet, as a general rule, you are only allowed to pay back the withdrawal within two years after the end of active duty service.

3. Higher Education Expenses

Another widely used IRA withdrawal exception helps you to cover "qualified higher education expenses." However, they can only be applied to postsecondary schools. Established guidelines point out which education expenses qualify. They include:

  • Tuition
  • Room and board (for students enrolled at least half time)
  • Books and supplies

Moreover, the distributions of this withdrawal need not go to the account owner's education expenses. They can be used to cover the expenses of immediate family members (spouse, children, grandchildren, etc).

Withdrawing money (up to $10,000) from an IRA for your first home purchase may also be exempt.

Withdrawing money (up to $10,000) from an IRA for your first home purchase may also be exempt.

4. First Home Purchase

Another often-used IRA withdrawal exception comes into play when you are in the process of buying, building or rebuilding your first home. The tax code allows you to withdraw up to $10,000.00 from your retirement account explicitly for this purpose.

And here is another nugget of wisdom. The tax code defines a "first-time homebuyer" as someone who has not owned a home in the previous two years. Essentially, what this means is that you could technically have owned a home in the past and still qualify for the exception. You're welcome!

What About Inheriting an IRA?

Generally speaking, you are exempt from the 10% withdrawal penalty if you are the listed beneficiary of the IRA and the IRA funds transfer to you upon the account owner's death. However, there is one (very exacting) exception to this rule. You will not receive the 10% penalty exemption if:

  • You're the spouse of the original IRA account holder, you are the sole beneficiary of this account, and you request a spousal transfer of the IRA funds into your own IRA. The funds you are attempting to transfer will be treated as yours in the first place, and the 10% penalty will apply.
The IRA withdrawal exception can apply to IRS levies made against an account.

The IRA withdrawal exception can apply to IRS levies made against an account.

IRS Levy

When you have unpaid federal taxes, the IRS has many broad powers to get that money back (i.e. wage garnishment). One popular method is through back levies—yes, even your IRA account. Yet, in generous fashion, if the IRS chooses to levy your IRA account directly, the 10% penalty fine will not apply. It will apply, however, if you choose to withdraw money from your IRA to pay the IRS on your own volition.

Substantially Equal Periodic Payments (SEPP)

Contrary to what many believe, there is actually a way to withdraw money from your IRA account at any age. However, you must be prepared to set up a withdrawal schedule over a period of time. That period of time is defined as such:

Five years or until you reach the age of 59 1/2 (whichever event occurs later).

Additionally, there are exactly three methods to calculate your ongoing withdrawal quantity (the amount of money you will withdraw periodically over the time period). These methods for calculating SEPP withdrawal are laid out in this link.


This last exception may seems obvious, but I felt it was important enough to include. If you are planning to rollover your existing IRA into another IRA (like at another institution), you will avoid the 10% penalty when the money is transferred. However, make sure that this transaction is completed within 60 days of initiating the rollover.

Withdraw From Your IRA Only as a Last Resort

As I mentioned before, withdrawing money from your IRA account should be considered your last option. It may seem like a good idea in the moment, but your golden years are precious; make sure you have enough money set aside to make them great years.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.


Liz Westwood from UK on November 17, 2019:

Pensions is a very relevant and useful topic to cover. Much was made of a change in legislation a few years ago in the UK, allowing people to withdraw from their pension funds after 55. The fear that many would splash out on luxury holidays etc. appears to have been unfounded, with most favouring a more cautious approach.