How to Make an Early Withdrawal From Your IRA Without Paying the Fee

Just Because You Can, Doesn’t Mean You Should

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If 2020 has shown us anything, it’s that uncommon circumstances can force undesirable actions. For many this year, that has affected the way they are handling their retirement accounts.

The economic fallout of the COVID-19 outbreak resulted in millions of Americans losing their jobs and needing to tap into retirement funds to pay bills, including mortgages and other costs of living. Often, withdrawals of this sort from a retirement fund such as a 401(k), 403(b), or traditional IRA before the account holder turns 59½ years old trigger a 10% penalty. However, the CARES Act of 2020 allowed individuals who have been affected by the pandemic to withdraw up to $100,000 of their retirement savings in 2020 without incurring an early withdrawal penalty.

For those who eventually land back on their financial feet, the CARES Act also allows eligible individuals to avoid counting the amount they withdrew from a qualified retirement plan as taxable income if they repay the full amount within three years. In other words, it’s an interest-free and penalty-free loan (albeit, from your own savings) to help people bridge the hard times caused by the pandemic. 

CARES Act and Retirement Accounts

To help the millions whose finances have been adversely affected by the pandemic, the CARES Act in March 2020 created special distribution options for eligible individuals’ retirement accounts. Here are the key points regarding withdrawals and loans from those accounts:

Penalty-Free Early Withdrawals

The 10% penalty for withdrawing funds before turning 59½ is eliminated. The money withdrawn in 2020 will be included as income divided equally over the next three years, unless they elect otherwise.

Tax Avoidance

The CARES Act allows individuals to avoid taxes on the amount withdrawn if they repay the amount to their retirement account within three years.

Withdrawal Limits

Qualified individuals may withdraw up to $100,000 of their retirement account in 2020 without penalty.


You are qualified to participate if:

  • You, a spouse, or a dependent is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC).
  • You experience adverse financial consequences due to being quarantined, furloughed, laid off, or having work hours reduced because of the pandemic.
  • You experience adverse financial consequences because the pandemic results in child care being unavailable and you are unable to work as a result.
  • You experience adverse financial consequences due to the closing or reduced operating hours of a business you own or operate due to COVID.

Employers Can Amend Rules or Opt Out

Employers may amend or opt out of the distribution and loan rules of the CARES Act. For example, an employer may set a lower or higher limit for a coronavirus-related distribution, or choose to not change its rules regarding 401(k) or 403(b) loan repayment schedules. 

It is wise to make sure you fully understand the rules of an early withdrawal or loan from your retirement savings under the CARES Act by talking with a representative of your employer’s retirement plan, a representative of the brokerage where you hold your IRA, or a tax adviser.

Reasons for Early Withdrawal

The best idea, of course, is to let retirement savings grow as long as possible. The 10% penalty for early withdrawals is meant to discourage individuals from taking money out of these accounts prematurely for short-term or non-emergency needs. If the generous tax benefits of directing funds to a retirement account are the carrot for saving, the penalties for early withdrawals are the stick.

“People have learned that retirement savings are the last source they should go to [in emergency situations],” Katie Lewis, a tax preparer and investment adviser representative at Financial Security Management Inc. in Lakewood, Colorado, told The Balance in a telephone interview.If one of our clients brings it up, we look at all their other assets and see if we can come up with a creative solution where they don’t need to dip into their retirement savings.” 

But policymakers understand that lives get interrupted. Job loss, disabling accidents, health problems, death, and other major life events can leave retirement account holders or family members in dire straits financially. For this reason, there are exceptions that allow for penalty-free early withdrawals from retirement accounts such as an employer-sponsored 401(k), traditional IRA, Roth IRA, SEP (Simplified Employee Plan) IRA, or SIMPLE (Savings Incentive Match Plan for Employees) IRA. Many of these exceptions are classified by the IRS as hardship distributions.

In most cases, an early withdrawal of funds from a traditional IRA or qualified retirement account will be treated as taxable income. This is not true for a withdrawal of principal from a Roth IRA, which has already been subjected to income tax.

Common Exceptions to Early Withdrawal Penalty

In addition to the coronavirus exceptions outlined above, here are the most common exceptions to the 10% federal penalty tax for early withdrawals from most retirement accounts.


Early withdrawals are penalty-free if the full amount is used to cover a qualified higher education expense in the same tax year as the withdrawal. The expense must be for the education of the account owner or the account owner’s spouse, or for the child, stepchild, or adopted child of the account owner or the account owner’s spouse.

Medical Expenses

Qualified medical expenses that exceed 7.5% of the account owner’s adjusted gross income (AGI). These expenses must be paid within the same tax year that you withdraw the funds. 

First-Time Home Purchase

Penalty-free withdrawals are allowed for expenses within 120 days from a qualifying purchase of a primary residence by an account owner, an account owner’s spouse, child, grandchild or grandparent, or a spouse’s child grandchild or grandparent.

There is a lifetime limit of $10,000 on this exception for a first-time home purchase.

Birth or Adoption

New parents can withdraw up to $5,000 from a qualified retirement account penalty-free to pay for birth or adoption expenses.

Health Insurance 

If you have received unemployment insurance payments for a minimum of 12 weeks, you can withdraw funds from a qualified retirement account penalty-free to pay health insurance premiums for you or your dependents.


A person can withdraw from an IRA if he or she becomes physically or mentally disabled resulting in an inability to perform his or her job or otherwise participate in gainful activity.


Beneficiaries may withdraw funds penalty-free after an account holder’s death. However, if a decedent’s retirement funds are rolled over to a survivor’s IRA, those funds are no longer available for early withdrawal without penalty.

Military Exceptions

Qualified military reserve members who are not active, but are called to duty for at least 180 days or for an indefinite period, may make an early withdrawal from a retirement account without incurring the early distribution penalty. 

Money Owed to the IRS

If you owe back taxes and the IRS issues a levy against your IRA, the funds removed will not be subject to an early withdrawal penalty as long as you authorize the IRS to remove the funds directly.

Substantially Equal Periodic Payments (SEPPs)

The SEPP program allows you to make early withdrawals from an IRA or a qualified retirement plan without incurring the 10% penalty. However, financial advisers generally agree the rules of this program make it the worst among a batch of undesirable options. Furthermore, the rules are complex. Under a SEPP plan, you must withdraw annual payouts from your retirement account for five consecutive years or until you reach age 59½, whichever comes later.

Alternatives to Tapping an IRA for Funds

As a reminder, it’s best to exhaust all other options for an infusion of cash before withdrawing from a retirement account, primarily because compound interest growth over several years is critical to having enough savings to retire. 

Besides borrowing from a 401(k) plan with the intention of repaying yourself the money, other alternatives include taking out a low-interest loan from a bank or credit union, refinancing a home mortgage or securing a home equity loan, finding a side gig to earn extra income, or borrowing from a family member.

Key Takeaways

  • There are situations in which you can withdraw funds from an IRA or qualified retirement account before age 59½ without incurring the 10% penalty tax, but most of these should be an option of last resort.
  • Early withdrawals from most retirement accounts are still taxable as income.
  • The CARES Act of 2020 delivered several additional options for emergency withdrawal from retirement accounts without penalty for individuals whose financial lives have been disrupted by the pandemic.
  • The principal amount invested in a Roth IRA is always available to an investor without penalty because it’s already been taxed.