Given this lousy economy and the financial pressures many taxpayers are facing, it may be that some of those retirement funds are needed just to survive. Early withdrawals from a traditional IRA before age 59½ generally incur a 10 percent penalty tax on the taxable portion of the withdrawal in addition to the income tax.
Fortunately, there are many exceptions to this early withdrawal rule that can help you avoid the penalty under specific circumstances. Below, I have outlined the key exceptions that may apply to your situation.
Substantially equal periodic payments. You can arrange for a series of substantially equal periodic payments. This method requires careful calculation (similar to the RMD) and adherence to strict rules but allows penalty-free withdrawals. However, if a mistake in the calculation is made, then all the withdrawals could be subjected to the penalty.
Medical expenses. Withdrawals for medical expenses exceeding 7.5 percent of your adjusted gross income, or AGI, are exempt from the penalty. You do not have to itemize to use withdrawal funds penalty-free. However, you must pay for the medical expenses in the year of withdrawal.
Higher education expenses. You can use penalty-free withdrawals for qualified higher education expenses for you, your spouse, and your children. Qualified expenses are the same as those defined for Section 529 plans.
First-time home purchase. You can withdraw up to $10,000 (lifetime limit) for qualified home acquisition costs without penalty. The expenses must be paid within 120 days of the withdrawal.
Birth or adoption. You can withdraw up to $5,000 for expenses related to the birth or adoption of a child. The withdrawal must be made within one (1) year of the birth or final adoption of the child.
Emergency expenses. Starting January 1, 2024, you can withdraw up to $1,000 annually for emergency personal expenses without penalty. This can be done one a year.
Disaster recovery. Withdrawals for qualified disaster recovery expenses are exempt from the penalty, up to an aggregate limit of $22,000.
Disability. If you are disabled and cannot engage in substantial gainful activity, you can withdraw funds without penalty.
Long-term care. Beginning December 29, 2025, you can take penalty-free withdrawals for qualified long-term care expenses.
Terminal illness. Withdrawals due to terminal illness are exempt from the penalty.
Post-death withdrawals. Amounts withdrawn after the IRA owner’s death are not subject to the penalty. There are some exceptions to this rule, so further research may be required to ensure it complies.
Military reservists. Active-duty military reservists called to duty for at least 180 days can withdraw funds without penalty.
Health insurance premiums during unemployment. If you receive unemployment compensation for 12 consecutive weeks, you can withdraw funds to pay for health insurance premiums without penalty.
Domestic abuse victims. Starting January 1, 2024, you can take penalty-free withdrawals of up to $10,000 if you are a victim of domestic abuse.
IRS levies. Withdrawals to pay IRS levies on the IRA account are not subject to the penalty. It dies NOT apply if the levy is served on the taxpayer’s other property and the taxpayer withdrawals IRA funds to satisfy the levy.
It’s important to note that SIMPLE IRAs incur a 25 percent penalty for early withdrawals within the first two years of participation. Additionally, Roth IRAs have different rules, allowing penalty-free access to contributions but potentially taxing and penalizing withdrawals of earnings.
Bottom line – do your research homework (or consult with a tax professional) BEFORE you make a withdrawal to ensure that you are not surprised at tax time with an unexpected penalty.