The Internal Revenue Service doesn't charge withdrawal penalties after you are 59 1/2 years old. For Roth accounts, the IRA must be five years old as well. Otherwise, early distributions usually carry a 10 percent penalty on top of applicable income taxes. However, exceptions to this IRS rule may allow you to withdraw from your IRA without penalties.
Early Distribution Penalty Exceptions
IRS rules governing IRAs allow waivers to the early withdrawal penalty for several reasons. These exceptions are the same whether you have a traditional or Roth IRA. In two situations the penalty does not apply:
- You are a beneficiary, meaning you inherited the IRA
- You are completely and permanently disabled
Certain circumstances can cause financial hardship, so the IRS allows penalty-free early distributions to help mitigate that. The waiver extends only to the amount of the expense.
- Payment of an IRS levy
- Medical bills in excess of 10 percent of your adjusted gross income that are not covered by health insurance
- Payment of health insurance premiums during a period of unemployment
- You withdraw IRA funds as a reservist called to active duty for 180 days or more
- You receive the money as payment of an annuity
The IRS has two additional exceptions that allow you to use IRA money to achieve non-retirement goals:
- To refurbish, construct or purchase a first home
- To pay qualified expenses so you, your spouse or your dependents can pursue higher education.
Roth IRA Early Withdrawals
Some early withdrawals from Roth IRAs may be qualified, meaning you incur no penalties or income tax liability for pulling the money out. The Roth IRA has to be at least five years old and one of the following conditions must be satisfied:
- You become disabled
- You inherit the IRA
- You use up to $10,000 in investment earnings toward purchasing or renovating a first home
In addition, money you've contributed to a Roth IRA may be pulled out at any time without saddling you with either the penalty or any income taxes. This can help you avoid penalties, because the IRS counts money taken from a Roth as contributed cash up to the amount you've put in the account since you opened It. If you withdraw more, it counts as rollover money and is free of income taxes as well. However, the 10 percent early withdrawal penalty applies unless the rollover occurred more than five years previously.
Once all contributions and rollover dollars are removed from a Roth, additional distributions count as earnings. These won't be subject to the penalty tax if an IRS exception applies. However, an unqualified withdrawal of earnings before you are 59 1/2 years old and the Roth IRA is five years old is subject to income taxes.