Hardship Reasons to Cash in an IRA

An early IRA distribution costs you on taxes unless an exception applies.

An early IRA distribution costs you on taxes unless an exception applies.

Unlike 401(k) plans, there's no such thing as a hardship distribution from an individual retirement account. Instead, you can take money out of your IRA whenever you want. But, if you want to avoid the 10-percent early withdrawal penalty that applies to taxable withdrawals taken before you turn 59 1/2, you must meet one of the penalty exemptions.

Medical Costs

IRAs offer two different penalty exceptions for various medical expenses. First, if you're unemployed, you can take out money penalty-free to pay medical insurance premiums for yourself, your spouse and your dependents. Second, you can take out enough money to cover the portion of your medical expenses that exceed 10 percent of your adjusted gross income (AGI). For example, if your medical expenses exceed 10 percent of your AGI by $2,000, the first $2,000 of your IRA withdrawals come out penalty-free.

Death or Disability

If you become permanently and totally disabled, you can take out as much as you want without paying any early withdrawal penalties. To be disabled, you need a doctor to say that you can't do any gainful activity because if your physical or mental condition and that the condition is expected to last for an indefinite period of time. In addition, if you inherit an IRA, you can take distributions as the beneficiary without paying the early withdrawal penalty, regardless of your age.

First-Time Home Purchase

If you haven't owned a home within the past two years, and the same if true of your spouse if you're married, the IRS considers you a first-time home buyer and allows you to withdraw up to $10,000 toward the purchase of a new home. This can include not only the down payment, but also closing costs, as long as you pay them within 120 days of taking the distribution. You can also use this exception to help a child or grandchild buy a first home, but the $10,000 limit applies to all distributions under the exception over your lifetime. For example, if you used $8,000 when you bought your first home, you would only use $2,000 to help your kid buy a first home.

Higher Education Expenses

The IRS also lets you off the hook on the early withdrawal penalty if you take out money to pay for higher education expenses, such as tuition, mandatory fees and, if the student is enrolled at least half-time, room and board. It includes costs for yourself as well as your spouse, children or grandchildren. For example, if you wanted to pay for your daughter's trade school tuition from your IRA, you wouldn't owe any penalties.

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