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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Your individual retirement account (IRA) is a savings account for your future. Ideally, you place money in it yearly and watch it compound until you retire. The money in your IRA is yours, but in a way, it's on hold until you reach 59½ years of age. You can access it before then, but you may need to pay for the access. If you need to take some out of your account, you'll have to include it in your gross income and pay an extra 10% additional tax—most of the time.

There are some reasons the Internal Revenue Service lets you withdraw from your IRA early without paying taxes. Learn more about these reasons and why it's best to try to find other funds before taking any out of your IRA.

Reasons for Early Withdrawal

The best course of action is to let your IRA grow as long as you can. The 10% tax on early withdrawals keeps people from taking money out of these accounts for short-term or non-emergency needs.

“People have learned that retirement savings are the last source they should go to [in emergencies],” Katie Lewis, a tax preparer and investment adviser 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.” 

The penalties are built into tax laws. But lawmakers know that life happens. Job loss, disabling accidents, health problems, and other events can make it tough to earn enough money to get by. Because there are events outside of people's control, the IRS allows you to make early withdrawals from your account(s) for certain reasons without paying fees or taxes. The IRS classifies these reasons as hardship distributions.

When you take funds from an IRA or qualified retirement account, it will be treated as taxable income in most cases. Roth IRAs have already had taxes paid on the money held in them, so there are no taxes on the money you take out of your Roth IRA.

Common Exceptions to Early Withdrawal Penalty

Here are the most common reasons you can take early withdrawals from most retirement accounts without paying the 10% extra tax.

Education 

If you're taking money out to cover a higher education expense in the same tax year, you won't be charged a tax. The educational expense must be for you, your spouse, or the children or grandchildren of either you or your spouse.

Medical Expenses

You can take money out of your IRA for certain medical expenses. The bills must be more than 7.5% of your adjusted gross income (AGI). You'll also need to pay them within the same tax year that you withdrew the funds.

First-Time Home Purchase

If you're buying, building, or rebuilding your first home, you can take money out of your IRA for home purchase expenditures, including closing costs. You must spend the money toward the home within 120 days after withdrawing it. You can also use the funds to buy, build, or rebuild a house for your or your spouse’s child, grandchild, parent, grandparent, or other ancestor. There is a lifetime limit of $10,000 for a first-time home purchase. If you're married, you and your spouse can each take out $10,000.

The first-time home buyer exceptions are still reported on your taxes and taxed as income.

The IRS considers you a first-time homebuyer if you and your spouse buy your first home or have not owned a home separately or together within the last two years.

Birth or Adoption

New parents can withdraw up to $5,000 to pay for birth or adoption expenses. You have up to one year after the birth or adoption to withdraw the amount. Also, you're allowed to recontribute an amount equal to the withdrawal back into your plan in addition to your normal contributions.

Health Insurance 

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

Disability

You can withdraw from an IRA if you become physically or mentally disabled. Your physician must document this, and the issue must result in an inability to perform work or otherwise participate in gainful employment.

Death

Your beneficiaries may withdraw funds without paying the additional 10% tax if you die. However, if they roll the funds over to a survivor’s IRA or begin making contributions to it, those funds can no longer be used in an early withdrawal without paying additional taxes.

Military Exceptions

If you're part of the military reserves, National Guard, or a Public Health Service reserve member, you can take funds out of your account if you're activated. You have to be called to duty for at least 180 days. These are called qualified reservist distributions.

Qualified reservist distributions must fall between the date of the order to active duty and the last day of the period of active duty.

Money Owed to the IRS

If you owe back taxes, the IRS can issue a levy against your IRA. It will not charge an early withdrawal penalty as long as the IRS removes the funds directly.

Substantially Equal Periodic Payments (SEPPs)

The SEPP program allows you to make early withdrawals from an IRA or a retirement plan without the 10% penalty. One of the issues with SEPPS is that the rules are complex and require a financial professional to help you choose the right type of withdrawals and plan.

Under a SEPP plan, you must withdraw annual payouts from your account for five consecutive years or until you reach age 59½, whichever comes later.

Special Circumstances

You might be able to withdraw funds from your IRA if special circumstances affect many people financially. For example, the coronavirus pandemic caused many people to lose jobs or not work, which led Congress to pass a bill that included letting people access the funds in their IRAs to help pay bills without penalty.

If there is an event that affects many people financially, look for any new laws that might allow for early withdrawals from your IRA.

Natural disasters, economic recessions, or other declared emergencies in the future might be cause for tax relief measures on early IRA withdrawals.

Alternatives to Tapping an IRA for Funds

It’s always best to exhaust all of your other options before taking money from your IRA. This is because you need the compound interest growth over several years to have enough to retire on. Taking money out lowers the rate at which your money can compound.

Besides borrowing from a 401(k) plan and paying it back later, you have other options. Some might include taking out a low-interest loan from a bank or credit union. You could look into refinancing your home mortgage or taking out a home equity loan if your home has increased in market value. You could also find a side gig to earn extra income if you have time.

Key Takeaways

  • There are many reasons you can withdraw funds from an IRA or retirement account before age 59½ without the 10% additional tax. If you can help it, taking money from your IRA should always be your last resort.
  • Early withdrawals from most IRAs are still taxable as income plus the 10% additional tax.
  • If you have a Roth IRA, you can access the funds without penalty because it’s already been taxed.