Avoiding IRA Withdrawal Penalties

After you’ve spent years stashing cash in your IRA, what happens if you’re suddenly faced with the need to get your hands on some of it? In most cases, unless you’re over age 59 1/2, you’ll pay a 10% penalty on any amount you withdraw, in addition to paying income tax on that amount at your regular tax rate. There are some exceptions, however, that allow you to take money out of your IRA penalty-free.

The two most common exceptions are assets you take out to pay for educational expenses or to put toward the purchase of a new home. If you take money out to pay the cost of postsecondary education for yourself, your spouse, your children, or your grandchildren, there’s no penalty. Ditto on up to $10,000 you take out to buy your first home.

There are also withdrawal exceptions that apply to military reserve personnel, as well as what are known as hardship exceptions. These include money used to pay unreimbursed medical expenses that exceed 7.5% of your adjusted gross income or used to pay health insurance premiums if you’re unemployed. To be penalty-free, the amount you withdraw cannot be more than the actual expenses involved and, in all cases, you still owe income tax on the amount you take out.

These exceptions to early withdrawal penalties also apply to Roth IRAs, but with a slightly different twist. If it’s been five years since you first opened the Roth, you can withdraw any amount without penalty. Also, since Roth contributions have already been taxed, you would owe income tax only on any earnings. But if you take out money before the five-year term is up, you’ll be hit with the 10% penalty on the full amount unless you can apply one of the exceptions above.