1975 was a big year in financial annals when Americans were given a brand new way to save for retirement in something called an Individual Retirement Account—an IRA. You could put money into the account before taxes and the money got to grow tax-deferred. You didn’t have to pay taxes until you started taking money out, theoretically after you retired.

The government was serious about an IRA being retirement money, so a provision was inserted into IRA rules that said you have to pay a 10% penalty on any money you take out of the IRA before age 59 ½. That still applies today, 46 years later. However, over time the IRS has decided that you should have access to your money, without penalty, for certain life events.


Medical Expenses

You can withdraw money from your IRA to pay for significant medical expenses. Your definition of significant and the government’s may differ. The rules say a penalty-free withdrawal is for medical expenses that exceed 10% of your adjusted gross income and it has to pay for medical expenses not covered by health insurance.


Pay for Health Insurance

Even if your expenses don’t exceed 10% of adjusted gross income, you can take money out of your IRA to pay for health insurance if you lose your job and collect unemployment compensation for 12 consecutive weeks. The withdrawal can be used to pay for health insurance for you, your spouse, and your dependents. But there’s a time limit. The distribution to pay for health insurance must be made in the same year you received the unemployment compensation.



In this instance, you have to truly be disabled and a doctor has to attest to the severity of the disability.


1st Time Home Purchase

You can withdraw $10,000 from your IRA without penalty for a first-time home purchase, $20,000 for married couples. The IRS definition of a first-time homebuyer is a little different than you’d expect. According to the IRS, a first-time homebuyer is anyone who hasn’t owned a home in the last two years. That means you’re able to withdraw from your IRA, penalty-free, even if you’ve owned a house in the past. You just can’t own a house for two years prior to the withdrawal.


Substantially Equal Periodic Payments

According to Rule 72(t), section 2 of the Internal Revenue Code, at any age, you can take money from your IRA without penalty if you take the same amount every year for five years or until you turn 59 ½, whichever is longer. Make a change to the amount and you’ll have to pay the penalty on all the money you’ve withdrawn from day one.


Inherited IRA Withdrawals

If you take money out of an IRA you inherited from someone, those withdrawals fall into the no-penalty zone. And that’s a good thing. Under the most recent tax changes, you have to have all the money out of the inherited IRA by the end of the 10th year after the death of the person you inherited it from. If not, then you will pay penalties.


Roth IRA Contributions

Because you’ve already paid taxes on the contributions you make to a Roth IRA, you can take that money out of the Roth anytime you want without penalty. However, if you take earnings on the money out of the Roth before you reach age 59 ½ or before those earnings have been in the account for at least five years you will be penalized.


Roth IRA Qualified Education Expenses

There’s a little more leeway with withdrawals from a Roth IRA when it comes to paying for qualified education expenses. In this instance, you can take out your contributions without paying a penalty.


The IRS says qualified expenses are amounts paid for tuition, fees, and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period that starts during the tax year or the first three months of the next tax year.
Eligible expenses also include student activity fees you are required to pay to enroll or attend the school. For example, an activity fee that all students are required to pay to fund all on-campus student organizations and activities.


401(k) Withdrawals

401(k)s are not technically IRAs, but they are tax-deferred retirement savings accounts that have a penalty-free withdrawal option. If you leave or retire from your job between the ages of 55 and 59 ½ you can take withdrawals without paying the IRS penalty. But the money has to stay in the 401(k). If you roll it over into an IRA and begin taking withdrawals you lose the no-penalty option and will have to pay the early distribution penalty.


401(k) Loans

Borrowing money from your 401(k) does not incur a withdrawal penalty. You can borrow up to 50% of your account balance to a maximum of $50,000. But if you quit your job and have an outstanding loan balance, the IRS requires you to repay the balance within 60 days. If you don’t, the IRS classifies the balance as income for that year and you’ll pay taxes and a 10% penalty on the outstanding loan balance.


Even if you qualify for one of these penalty-free withdrawals, the IRS still wants its tax money. You’ll have to pay federal income tax on every withdrawal along with state taxes, unless you live in one of the nine states without an income tax—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.