How to Avoid an IRA Early Withdrawal Penalty

The IRS imposes a hefty 10 percent penalty on withdrawals from an IRA before age 59 1/2. However, sometimes people take money from an IRA without realizing that the IRS has a few exceptions to this age limit. It’s possible to withdraw money early from your IRA and avoid penalties, but you’ll need to understand some basics before exploring what avenue may help you. Those who qualify for an exception may be able to save a nice chunk of their withdrawal dollars from penalties.

Use your Roth IRA before any traditional IRAs. Money you’ve contributed to a Roth IRA was never deducted from your taxes, so you’re allowed to claim all these funds penalty-free. Don’t use your Roth IRA as a savings account, though. Most funds used for a Roth IRA, such as mutual funds, can be volatile and once you remove a contribution, it can’t be replaced.

Explore substantially equal period payment rules. Anyone is allowed to remove money early from their IRA without penalty if they take funds annually for at least five years. The withdrawals have to extend beyond age 59 ½ and may be taken in any method you wish. The bad news is that you aren’t allowed to choose the amount of the withdrawals; they occur according to a IRS table based on your life expectancy.

Pay back the funds in 60 days or less. The IRS allows you to move money penalty-free as long as it’s returned by the 60 day deadline. The IRS considers this to be a non-taxable rollover of funds. Don’t think of your IRA as a place to frequently borrow money. The rules only allow you to remove funds once every 12 months for each account.

Use IRA money to purchase a new home or education expenses. If you’re considering using IRA money to pay the bills while you’re in school or buying your first home, you may be able to do so penalty-free. You may take up to $10,000 from your IRA for a first-time home purchase. Education expenses such as tuition, books and supplies are penalty-free for yourself, your spouse or your children or grandkids. An IRA can be used for room and board also, as long as the student is enrolled at least half-time.

Use your IRA to pay non-reimbursed medical expenses. If your medical bills are over 7 1/2 percent of your adjusted gross income, you’re allowed to use IRA dollars penalty-free. If you’re unemployed and are paying out-of-pocket for health insurance, this is covered after you’ve collected unemployment benefits for 12 consecutive weeks.