8 Exceptions to the 10% Penalty for an Early IRA Withdrawal

If you are age 59 1/2 or older, you can take an IRA withdrawal without any penalties at all.  But if you’re younger than age 59 1/2 you’ll have to pony up for an IRA penalty – unless of course you meet one of the exceptions below.

IRS publication 590 lists these exceptions to the 10% penalty for an early IRA withdrawal:

1. You take an early IRA withdrawal and you have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.  If you have a lot of medical debt, you may be able to take out IRA money without that 10% penalty.  Remember, medical expenses must be higher than 7.5% of your adjusted gross income.

2. You can take an early IRA withdrawal for medical insurance.  As long as your IRA distribution is not more than you paid for medical insurance you will not have to pay a 10% penalty if the following applies:

• You lost your job
• You received unemployment for 12 consecutive weeks because you lost your job
• You receive the IRA distributions during the year you received unemployment or the following year
• You receive distributions no later than 60 days after you’ve been re-employed

3. You can take an early IRA withdrawal if you are disabled.  Be sure to file a special tax form with your 1040 that lets the IRS know that you are disabled!

4. If you are the beneficiary of a deceased IRA owner, you can take an IRA withdrawal.

5. Your IRA withdrawal consists of receiving distributions in the form of an annuity.  Basically what the IRS means here is that you must take “substantially equal period payments”  – in other words a set amount per year for either a) five years or b) til 59 1/2, whichever is longer.

6. Your IRA withdrawal is not more than your qualified higher education expenses.  Alright, so you’d like to use your IRA money for college savings.  Your IRA withdrawal (as long as it is not more than your tuition) can be taken penalty free.

7. Your IRA withdrawal is used to buy, build, or rebuild a first home.  First home.  That’s the key here.  Not your second, third or fourth – it’s your first home and you are buying, building or rebuilding – then you can take an IRA withdrawal penalty free.

8. Your IRA withdrawal is a qualified reservist distribution.  A qualified reservist distribution is met if:

• You were ordered or called to active duty after September 11, 2001
• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a  reserve component
• The distribution is from an IRA, 401k or 403b plan
• The IRA withdrawal is made no earlier than the date of the order or call to active duty and no later than the close of the active duty period

These exceptions have some qualifiers on them so it’s important to look at the IRS publication to make sure you fit into one of these categories before you take the money out.

Also, don’t fall into the trap thinking that these exceptions are for taxes!  You still have to pay taxes on any withdrawal you take out.  The exception is for the penalty only.


The Bottom Line - Consult with your tax professional for assistance with determining possible waiver of penalties.

Source:   IRS Publication 590


The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in 

the top 25 of Certified Financial Planners in Jacksonville

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association