IRA Hardship Withdrawal Without Penalties

An IRA allows you to build up tax-deferred savings for your retirement.

An individual retirement account gives taxpayers a way to save for their retirement and defer taxes on the investments. Because of this deferral, there are rules about withdrawing money from an IRA before retirement age. If you do not follow the rules, you will be subject to a tax penalty. Exceptions to these rules are available for certain hardships and other conditions.

History

In 1974, Congress passed the Employment Retirement Security Act, which allowed taxpayers to invest an amount in an individual retirement account and deduct that amount from their taxable income. The person would pay taxes on the money when it was withdrawn at retirement. In 1997 the Taxpayer Relief Act created the Roth IRA, which allowed a taxpayer to invest after-tax dollars. No deduction could be taken for the investment, but the taxpayer would not pay taxes on any of the money  withdrawn at retirement.

Withdrawals from a Roth IRA

Since you fund a Roth IRA with after-tax money, you can withdraw the contributions that you have made to a Roth IRA penalty- and tax-free at any time, since you have already paid the taxes on the money. The earnings part of a Roth IRA are subject to income taxes and an early withdrawal penalty, if withdrawn before the account holder is age 59 1/2.

Withdrawals from a Traditional IRA

You deduct traditional IRA contributions from your income. Since you have not paid taxes on any of this money, the entire amount of a traditional IRA is taxable when withdrawn at retirement. In addition, the IRS levies a 10 percent penalty on any money withdrawn before age 59 1/2.

Hardship Penalty-Free Withdrawals

The IRS waives penalties on an IRA early withdrawal in certain circumstances. You can withdraw penalty-free to pay un-reimbursed medical expenses over 7.5 percent of your adjusted gross income. A total and permanent disability entitles you to a penalty-free withdrawal. When unemployed for more than 12 weeks, you can withdraw to pay health insurance premiums with no penalty. If you die, your beneficiaries may withdraw with no penalty, except for your spouse. Finally, you may withdraw any amount you owe the IRS if it is taking a lien against the account for collection.

Non-Hardship Penalty-Free Withdrawals

The law allows other withdrawals that are not necessarily hardships, but are special circumstances, penalty-free. You may withdraw to buy a home, provided you haven't owned a home within the last two years. You can withdraw for home purchases more than once, but only up to a total of $10,000 in your lifetime. You can also withdraw for higher education expenses for yourself, your spouse, children and grandchildren.

For Income Purposes in Early Retirement

You may withdraw, penalty-free, money that you are using for income, typically in early retirement. You must withdraw substantially equal amounts each year for at least five years. This would be as planned yearly income for early retirement and not for a one-time deduction.

Considerations

All of these instances allow for penalty-free early withdrawals. The withdrawals are still subject to taxes as required by the IRS. You may want to use a hardship withdrawal as a last resort. If hardship expenses could force you into bankruptcy, retirement accounts are exempt assets and can not be taken to pay creditors.

References

• IRS: FAQ About Retirement Plan Hardship Withdrawals
• Fox Business: Penalty Free 401(K), IRA Withdrawals
• CBS Marketwatch: IRA Withdrawals - Some Relief for Hardship
• Congressional Budget Office: Legislative History of the IRA