IRA Early Withdrawal Penalty Exemptions

In most circumstances, taking an early withdrawal from an IRA before age 59 1/2 would result in a 10% IRS penalty in addition to ordinary income tax.  There are certain specific situations, however, that Congress has deemed fit to waive the usual 10% penalty.  Unless otherwise noted, the following exemptions apply to both Roth and Traditional IRAs.  One important caveat is that the IRA in question must be at least 5 years old (on the tax calendar, not calendar years) to be eligible for any of the following exemptions.  Note these exemptions only apply to the 10% penalty and not to any income tax that may be due.  Please leave a comment if you notice any mistakes or I’ve omitted anything.

IRA Early Withdrawal Penalty Exemptions

First Time Home-buyer Exemption

Up to a life-time limit of $10,000, withdrawals from an IRA used for first-time home purchases are exempt from the 10% penalty.  While this exemption is meant mainly for first-time home buyers, any household that hasn’t owned a house within the last 2 years is eligible.

Education Expenses

According to the U.S. Department Of Education,

“Beginning January 1, 1998, a taxpayer may make withdrawals from an individual retirement account (IRA) to pay the qualified higher education expenses for the taxpayer, the taxpayer’s spouse, or the child or grandchild of the taxpayer or taxpayer’s spouse at an eligible educational institution. The taxpayer will owe federal income tax on the amount withdrawn, but will not be subject to the 10 percent early withdrawal tax that applies when amounts are withdrawn from an individual retirement account before the account holder reaches age 59 1/2.”

Permanent Disability Of The IRA Account Owner

Money can be withdrawn penalty-free in the event an IRA holder becomes permanently-disabled as defined by the Social Security Administration.

Non-Reimbursable Medical Expenses

Non-reimbursable medical expenses are eligible for penalty-free early withdrawals provided that the expenses exceed 7.5% of your Adjusted Gross Income (AGI).

Early Death Of The IRA Owner

Small consolation, but neither your estate nor your heirs will have to pay a penalty should you die before regular retirement age.

Roth IRA Early Withdrawal Exception

Since Roth IRA contributions are always made post-tax, contributions to a Roth IRA may be withdrawn at any time and for any reason with neither a penalty nor any income tax being due.  Earnings in the account above and beyond the sum total of all contributions are subject to the same penalties and exceptions as Traditional IRAs.