How to Make Penalty-Free IRA Withdrawals

Unexpected expenses may compel you to tap your individual retirement account (IRA) ahead of schedule. And with most plans, the government will impose a 10% penalty if you withdraw funds before you reach age 59 1/2. Many people work with financial advisors to help manage their retirement plans and grow their nest eggs. Let’s take a look at a few instances where you can make a penalty-free IRA withdrawal before retiring.

Why the Early Withdrawal Penalty Exists

The 10% early withdrawal penalty exists to deter savers from draining their nest eggs prematurely. It also limits the number of retirees dependent on government assistance down the line. Since most American families do not have adequate savings to retire, the penalty could help prevent millions from endangering their golden years.

Social Security benefits provide one source of income in retirement, but those payments rarely cover all of a retiree’s expenses – especially as healthcare costs climb. The early withdrawal penalty can help workers save enough to cover any gap between basic living expenses and Social Security benefits.

When Does the 10% Early Withdrawal Penalty Kick In?

Generally, the 10% penalty applies to any IRA withdrawals made before age 59 1/2. This is true for traditional IRAs, as well as SEP and SIMPLE IRAs. For Roth IRAs, you’re free to withdraw your original contributions at any time without a penalty. Early withdrawals of earnings, however, may trigger the 10% penalty. In other words, you can take out only what you put in.

The penalty is not the only cost you’ll face, though. A traditional IRA withdrawal is also subject to ordinary income tax. Early withdrawals of earnings from a Roth IRA may also be subject to regular income tax if you’ve had your IRA for less than five years.

How to Make a Penalty-Free IRA Withdrawal

The IRS allows penalty-free IRA withdrawals in several scenarios. With most traditional and Roth IRAs, penalty-free withdrawals are allowed before age 59 1/2 when:

You become totally and permanently disabled
The IRA owner passes away
The IRS has imposed a levy on your IRA for an unpaid tax debt

You can also make penalty-free IRA withdrawals if you are:

A military reservist called to active duty
Funding qualified education expenses
Purchasing your first home
Paying health insurance premiums out of pocket during a period of unemployment
Covering unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
Receiving substantially equal periodic payments as a form of income
Rolling money over from your IRA to another retirement plan within 60 days

When a Roth IRA is inherited upon the death of the owner, money can be withdrawn tax-free. But, the IRA still has to meet the five-year holding period to avoid the early withdrawal penalty. Funds held in a Roth IRA must be fully withdrawn by the end of the fifth year after the account owner’s death if the person inheriting the account isn’t their spouse.

Reporting Early IRA Withdrawals on Your Taxes

If you’re taking money from an IRA before retirement, you’re required to give the IRS a heads-up. Early IRA withdrawals and early withdrawals from other qualified retirement plans are reported on IRS Form 5329.

Completing this form can help you determine whether you owe an early withdrawal penalty on an IRA withdrawal and whether you’re responsible for paying income taxes on the distribution.

When You’re Required to Withdraw Money From an IRA

While the early withdrawal penalty is something to avoid whenever possible, that’s not the only IRA penalty to be aware of. For traditional IRAs, you must also consider required minimum distributions (RMDs). Determined based on your life expectancy and account balance, you must begin taking withdrawals in the year after you turn 73.

If you fail to take a required minimum distribution on schedule, the IRS can attach a stiff tax penalty. The penalty is currently 25% of the amount you were required to withdraw. And of course, you’d still owe ordinary income tax on traditional IRA withdrawals once you take a distribution.

The advantage of Roth IRAs is that the required minimum distribution rule doesn’t apply. You can leave your money in your account until you need to make a withdrawal, regardless of age.

Bottom Line

Your IRA is a powerful tool for retirement savings, but sometimes you need access to that money before retirement rolls around. If you’re considering an early IRA withdrawal, get to know the penalty exceptions. And if a penalty applies, make sure you plan so you’re not hit with an unexpectedly high tax bill after filing your return.

Tips for Making the Most of an IRA

A financial advisor can help you manage and invest your IRA. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keep the annual IRA contribution limits in mind as you plan out your finances. The IRS may adjust how much you’re eligible to save in an IRA each year. In 2024, the limit increased from $6,500 to $7,000, plus an extra $1,000 if you’re 50 or older.