Investing » Retirement » Penalty-Free Withdrawals From Traditional IRAs
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Penalty-Free Withdrawals From Traditional IRAs

Withdrawing money (“early” or “premature” distribution) before the age of 59½ is taxable. However, there are some exceptions you must know:

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I know the feeling  – you need money, and you need it NOW. We’ve all been there.

IRA stands for Individual Retirement Account and is a savings account, whose purpose is to support an individual's life after retirement. IRAs offers some tax advantages which makes them attractive. Withdrawing money (called “early” or “premature” distribution) before the age of 59½ is taxable. Moreover, individuals might pay an additional 10% distribution penalty. However, there are some exceptions to the rule:

  • Death of the individual
  • Permanent disability of the individual
  • First-time home buyers (only qualified)
  • Education and medical expenses (only qualified)
  • Health insurance premiums if you don't have a job
  • Others

Penalty-Free Withdrawals

If you need money, there are probably better solutions such as a quick loan. However, in this article, we will be going through all the exceptions in detail. They concern only Traditional IRAs, because there are other rules applied when a person inherits a Roth IRA (See the different types of IRA plans).

Let’s dive in:

Unreimbursed Medical Expenses

This is one of the exceptions in which you might avoid paying taxes. Sometimes your medical insurance cannot cover all the expenses, and you need to withdraw money to pay for them.

But don’t get me wrong: you cannot take out money endlessly, there are some limitations.

You can distribute a specific amount of money without having to pay a 10% penalty on it. This amount is calculated when you find the difference between the medical expenses and 10% of the person's adjusted gross income (AGI). If you were born prior to 2 January 1952, the percent is 7.5% of AGI.


Let's assume Peter generates $6,000 unreimbursed medical expenses. His AGI is $50,000 a year and 7.5% of it is $3,750. $6,000 minus 3,750 is $2,250, which is the penalty-free amount he can withdraw.

Medical Insurance

Sometimes an IRA owner needs to take money to pay medical insurance. This will be charge free only if the individual meets the following criteria:

  • They have lost their job.
  • For 12 weeks in a row, the IRA owner has received unemployment compensation.
  • The person has made the distributions the same year they have received the unemployment compensation or the following year.
  • 60 days after the individual has found a new job, they cannot receive distributions any longer.

Disability or Death

Sometimes people who have not reached 59.5 may become seriously ill, both physically or mentally. To cover their expenses, they might need to withdraw money from their IRS, which as previously mentioned is penalized. If the individual can prove his disability and its seriousness as well as permanency, they can be free of the 10% penalty.

Don’t forget:

If the owner of an IRA dies, the beneficiary will receive the money and may withdraw without having to pay the 10% additional tax.

IRS Levy

In the event of an IRS (Internal Revenue Service) levy on an individual's property or assets, the IRA owner can withdraw money without the taxes on it. However, distributions will be charged if the person is taking money out in order to stop the levy.

Education Expenses

In some cases, distribution is free of taxes and penalties if the IRA owner covers higher education expenses. It could be his or his dependent's expenses – spouse, children, grandchildren.

There are some requirements, though:

One of them is that the educational institution should be eligible for special aid provided by the US Department of Education. It could be a university, colleges, or other schools. It's important to note that expenses should be deemed “qualified”. In case you want to make use of this exception, you have to check whether the educational institution is eligible or not.

Substantially Equal Periodic Payment (SEPP)

Another exception in which a person can avoid the 10% penalty on early distributions if you start a SEPP program. The minimum period of the program is 5 years. Let's look at two examples:

Example 1: Stacey is 44.5 and takes a SEPP program. She will continue the program until she reaches 59.5, which means that the period will last 15 years.

Example 2: William is 56.5 and he has only 3 years left to reach 59.5. However, the minimum period required is 5 years, so he has to extend the program until he reaches 61.5

If you fail to finish your SEPP program, the IRS will require from you to pay all the taxes and penalties on the amounts you have distributed.

First Time Homebuyers

A first-time homebuyer may also be exempt from paying a 10% penalty of early distribution. The expenses made on buying or rebuilding a property should be on the IRA owner's behalf or for:

  • Their spouse
  • Children of both the owner and their spouse
  • Grandchildren of both the owner and their spouse
  • Parent of both the owner and their spouse

But remember this:

The amount of money that a potential first-time buyer can distribute without being charged is $10,000. If the individual is married, this amount applies to both individuals, so a couple can have $20,000 out of an IRA. These distributions can cover only qualified acquisition costs.

Withdrawals Between 59.5 and 70.5

There are specific rules for distributions between the age of 59.5 and 70.5. When a person turns 59½, withdrawals from his IRA are free of the 10% penalty. If you have other sources of income, it's not advisable to withdraw money.


Even though you are free of penalty, you might pay some taxes on the distribution. Another reason to avoid doing so is the fact that taking out significant amounts of money from IRA will decrease the total amount.

Distributions after 70.5

Once you reach the age of 70.5, the Internal Revenue Service (IRS) requires from you to make regular distributions. They are called Required Minimum Distributions (RMD). This is mandatory and should you fail to do it, penalties will follow. Keep in mind that it is only valid for Traditional IRAs. Owners of Roth IRAs don't have to make RMD. The owner of the IRA can withdraw all the money or just make regular distributions.

When the owner reaches 70.5, they have a deadline to make the first RMD. This is 1 April the following year.

Let see exactly how this works:

Vivian turns 70.5 on 26 November 2015. The law requires her to make her first RMD by 1 April 2016. If she decides to put off the distribution until the 1 April, she has to make another distribution on 31 December the same year. What's more, she will have to continue making her RMD by 31 December each year.

How To Calculate Your RMD

Here’s how it goes::

  • Check out the balance of your IRA on 31 December last year
  • Find the distribution factor corresponding to your age (the older the person, the lower the factor)
  • Divide the balance by the distribution factor


It's 2016 and Vivian's IRA account balance was $100,000 on 31 December 2015. According to her age, let's assume, the distribution factor is 21.5. So, $100,000/21.5 is $4,651 RMD. The minimum amount she has to distribute each year is $4,651.

Usually, RMDs are calculated by the institution which holds your IRA. If you do not meet the deadlines for RMDs, you will have to pay a 50% tax (excess-accumulation penalty) on the amount of money which was not distributed.

Let’s look at another example:

Vivian's IRA holder estimates that her RMD should be $3500 a year. By 31 December she has withdrawn only $2500. She is penalized and has to pay 50% excess-accumulation tax. How to calculate? $3500 – $2500 is 1000$. 50% of $1000 means $500 penalty.

Keep in mind that even if you missed the deadline, you can withdraw the money as soon as possible and correct your mistake. Sometimes, the penalty can be waived by the IRS. If it is not, you have to pay it when filing your federal tax return.

Other Exceptions

Another thing to know down the road is that the 10% early distribution penalty is not imposed on amounts of money free of taxes. They can be:

  • Distributions of nondeductible IRA contributions (money you cannot deduct these amounts from your income taxes)
  • Amounts which exceed the IRA contribution limit. To qualify, these amounts should be removed from the IRA before the owner files income taxes.
  • If you deposit distributions from a retirement plan (such a 401k) to your IRA account within 60 days, this amount will be exempt from taxes. This can only happen if it's rollover eligible.


Even though the general rules is that you cannot withdraw money from a Traditional IRA without having to pay a penalty before age 59.5, there are some exceptions.

We have discussed in detail most of them in the article and provided some examples. Some of them include death of the IRA owner, his permanent disability or to cover different expenses – medical, education or qualified acquisition costs. Also, keep in mind that once you reach the age of 79.5, you have to start making RMDs following a specific procedure and set rules.