When can you take money out of an IRA without penalty?

Individual Retirement Accounts (IRAs) are designed to help people save for retirement. To see that the money goes toward supporting people after they stop working, the law imposes a 10% tax penalty on an early IRA withdrawal. If you take your money out before you turn 59 1/2, you will generally incur the penalty tax — unless your withdrawal meets one of the standard exceptions.

IRA early withdrawal exceptions

• Disability: If you become totally and permanently disabled and cannot work, you can draw on your accounts without paying the IRA withdrawal penalty.
• Death: Should you die, your beneficiary will receive your IRA without paying the IRA withdrawal penalty.
• Health insurance while unemployed: You are generally allowed to withdraw money from your IRA without penalty to help cover health insurance premiums during the taxable year you are unemployed. To be eligible:
  • You must have received 12 consecutive weeks of unemployment compensation.
  • The IRA distribution must be made during the year such unemployment compensation is paid, or the succeeding year.
  • The withdrawal must be within 60 days after going back to work.
• Unreimbursed medical bills: Typically, you can take money out of your IRA without the 10% penalty tax for non-reimbursable expenses that exceed 7.5% of your adjusted gross income (AGI) for the year. For example, if your AGI is $100,000, you may use the withdrawal to cover any unreimbursed medical expenses over $7,500. So, if you had a total of $12,000 non-reimbursable expenses, the distribution could cover $4,500.
• Substantially equal periodic payments (SEPPs): If your IRA distribution is part of a pre-approved series of SEPPs made for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary, the withdrawal is generally not subject to the 10% tax penalty. Visit IRS.gov to review the certain requirements.
• Qualified higher education expenses: You may be able to use money in your IRA to help pay you or your children's qualified higher educational expenses (including tuition, books, supplies and fees) during the year.
• First-time home purchase: You can generally take up to $10,000 (lifetime limit) out of your IRA to put toward the purchase of your home if you qualify as a first-time homebuyer (someone who hasn't owned a home in the last two years).
• Terminal illness: If you become terminally ill, you can withdraw on your accounts without paying the 10% penalty tax.
• Qualified birth or adoption distributions: You may be able to use up to $5,000 for each birth or adoption. The distribution must be taken during the one-year period starting on the date the child is born or the adoption is finalized.

This isn't an exhaustive list — you might be able to take other types of distributions without paying a 10% tax penalty. For example, if you roll an IRA account into an employer retirement plan, you generally won't pay the 10% penalty tax, nor will you pay the penalty for a transfer incident due to a divorce.

Read more at IRS.gov and consider talking with your tax professional to determine if your distribution qualifies for an exception to the 10% penalty tax.