How to Withdraw From an IRA Without Penalty

Individual Retirement Accounts (IRAs) help people save for retirement with tax advantages, but withdrawing funds too early can result in penalties. Knowing when you can access your money without extra costs ensures you make the most of your savings.

Age Requirement for Penalty-Free Withdrawals

The IRS imposes a 10% penalty on withdrawals from an IRA before age 59½. After this age, withdrawals are penalty-free, though regular income taxes still apply. This rule encourages long-term savings and prevents premature depletion of funds.

The IRS calculates age based on birthdate. If you turn 59 on January 1, you must wait until July 1 of that year to withdraw penalty-free. Even a few months early results in the 10% penalty, plus income tax.

Required Minimum Distributions (RMDs) start at age 73. These mandatory withdrawals ensure tax-deferred funds are eventually taxed. Failing to take an RMD results in a 25% penalty on the amount that should have been withdrawn.

Exceptions That May Apply

Certain exceptions allow penalty-free withdrawals before age 59½. These exceptions, outlined in the Internal Revenue Code, apply to both traditional and Roth IRAs.

Medical Expenses

If unreimbursed medical expenses exceed 7.5% of adjusted gross income (AGI), penalty-free withdrawals are allowed. For example, with a $50,000 AGI and $10,000 in medical expenses, only the amount above $3,750 qualifies.

Expenses must meet IRS deduction rules, even if you don’t itemize. Documentation, such as medical bills and proof of payment, is required. The withdrawal must occur in the same tax year as the expenses. While the penalty is waived, regular income tax still applies.

First-Time Home Purchase

IRA holders can withdraw up to $10,000 penalty-free for a first-time home purchase. This applies to those who haven’t owned a home in the past two years. A married couple could withdraw up to $20,000 if both have IRAs.

Funds must be used within 120 days for qualified expenses like down payments and closing costs. If the purchase falls through, the withdrawal may become subject to the 10% penalty. Traditional IRA withdrawals are taxed as income, while Roth IRA withdrawals may be tax-free if the five-year holding rule is met.

Disability or Death

If an IRA owner becomes permanently disabled, they can withdraw funds without penalty. The IRS requires proof from a licensed physician confirming the condition prevents substantial gainful activity and is long-term or indefinite.

If the account holder dies, beneficiaries can take distributions without the 10% penalty. However, inherited IRA distributions follow different tax rules. Spouses can roll the funds into their own IRA, while non-spouse beneficiaries must withdraw the entire balance within 10 years under the SECURE Act of 2019.

Higher Education Costs

Penalty-free withdrawals can be used for qualified higher education expenses, including tuition, fees, books, supplies, and required equipment for the account holder, spouse, children, or grandchildren. Room and board qualify if the student is enrolled at least half-time.

The institution must be eligible for federal student aid. There’s no dollar limit, but only expenses incurred in the same tax year as the withdrawal qualify. While the 10% penalty is waived, traditional IRA withdrawals are still subject to income tax. IRA withdrawals may also affect financial aid eligibility.

Substantially Equal Payments

Penalty-free withdrawals before age 59½ are possible through substantially equal periodic payments (SEPPs). These must follow one of three IRS-approved methods: required minimum distribution, fixed amortization, or fixed annuitization.

SEPPs must continue for at least five years or until age 59½, whichever is longer. Stopping payments early results in retroactive penalties and interest. The calculation method generally cannot be changed. While SEPPs allow early access to funds, they require careful planning to avoid tax consequences.

Birth or Adoption

Under the SECURE Act of 2019, individuals can withdraw up to $5,000 per parent, per child, penalty-free for birth or adoption expenses. A married couple could withdraw up to $10,000 if both have IRAs.

Funds can be used for medical expenses, legal fees, and agency costs. Unlike other exceptions, this withdrawal can be repaid to the IRA later, though repayment isn’t required. While the penalty is waived, income tax still applies to traditional IRA distributions. Proper documentation, such as a birth certificate or adoption decree, is necessary.

Roth IRA Contributions and Penalties

Roth IRAs offer more flexibility than traditional IRAs. Since contributions are made with after-tax dollars, they can be withdrawn anytime without taxes or penalties. However, earnings are subject to holding period and age requirements.

The five-year rule determines whether earnings can be withdrawn tax-free. At least five tax years must pass from the first Roth IRA contribution before earnings can be withdrawn without penalty. The countdown starts on January 1 of the contribution year. Even if you’re over 59½, withdrawing earnings before meeting the five-year rule results in income tax, though the 10% penalty wouldn’t apply.

If an early distribution includes earnings, taxes and penalties depend on the reason for withdrawal. For example, if a Roth IRA has a $50,000 balance—$30,000 in contributions and $20,000 in earnings—only the earnings portion is subject to taxes and penalties. If $10,000 is withdrawn and $6,000 comes from earnings, taxes and penalties apply to that portion unless an exception is met.

For Roth conversions, a separate five-year rule applies. Each conversion starts its own five-year period, and withdrawing converted funds early results in a 10% penalty unless an exception applies. This rule prevents using Roth conversions as a loophole for early penalty-free withdrawals.

Documentation for Eligible Distributions

Proper documentation is essential for penalty-free IRA withdrawals. The IRS requires account holders to maintain records proving eligibility for exceptions. Financial institutions issue Form 1099-R for distributions, but taxpayers must substantiate their claims.

For withdrawals related to specific expenses, supporting documents such as invoices, receipts, or contracts should be retained. For medical expenses, statements showing payment dates and provider details are necessary. For education expenses, tuition bills and enrollment verification should be kept.

IRA distributions must be reported on Form 1040, with exception codes listed on Form 5329. The IRS doesn’t automatically recognize an exception unless properly documented. Failing to report a withdrawal correctly can result in penalties, interest, and legal scrutiny.