Although the function of a traditional IRA is to save money for your retirement years, you may need to access those funds earlier than planned. If you withdraw from an IRA before age 59 ½, you could face an early-withdrawal penalty. However, there are some exceptions that will exempt you from the penalty. We discuss these exemptions below.

Medical Costs

If you use your IRA to pay for medical costs that are more than 7.5% of your adjusted gross income (AGI), you could qualify for an exemption from the IRA tax penalty. You don’t need to itemize your taxes to take advantage of this exception to the early withdrawal penalty.

Health Insurance

If you use the IRA early withdrawal to pay medical insurance premiums, you might be exempt from the tax penalty, but you must meet these additional requirements:

• Due to job loss, you collected unemployment compensation paid under federal or state law for 12 consecutive weeks.
• You took the IRA withdrawal in the year you received unemployment, or the following year.
• If you’re re-employed, you took your IRA withdrawal within 60 days of the start of your new employment.

Disability

You might qualify for an exception to the tax penalty if you are disabled and under age 59 ½. Per the IRS, you might qualify if you are unable to perform any substantial gainful activity due to a mental or physical condition. A doctor will need to attest that your condition is likely to be prolonged and could even result in death.

IRA Inheritance

If you inherit an IRA, you are eligible to take penalty-free withdrawals, even before age 59 ½, though income tax on each distribution will apply. If the original owner of the IRA account passed away after Jan. 1, 2020, you are required to withdraw all assets from the inherited IRA within 10 years of the IRA owner’s death. However, this requirement does not apply if you are the surviving spouse or minor child of the original account owner, or if you are disabled, chronically ill, or up to 10 years younger than the original account owner.

Higher Education Costs

Qualified higher-education costs are exempt from the 10% tax penalty when IRA early withdrawals are used for such expenses. Those who qualify include you, your spouse, and the children or grandchildren of you or your spouse. If the student is enrolled at least half time, the funds may be used for room and board, tuition, fees, books, supplies, equipment, and special-needs services.

First-Time Home Purchase

Keep in mind that the IRS considers a first-time home buyer to be someone who hasn’t owned a home in the last two years. You may be exempt from the 10% penalty if you use up to $10,000 of an IRA early withdrawal to buy, build, or rebuild a “first” home. The funds can be used for you, a spouse, a parent, or grandparent. If you and your spouse both qualify as first-time home buyers, you may each withdraw $10,000 from your respective IRAs without incurring the 10% penalty. The distribution must be used to pay for qualified purchase and closing costs within 120 days after you receive the money.

Military Service

Members of the military reserves in the Army, Navy, Marine Corps, Air Force, Coast Guard, or Public Health Service may qualify for a reservist distribution that isn’t subject to the penalty tax on IRA early withdrawals. A qualified distribution in this case must meet these requirements:

• Member was ordered or called to active duty after September 11, 2001
• Member was ordered to called to active duty for a period of more than 179 days or for an indefinite period
• The distribution must be taken during the active-duty period in order to avoid the 10% early withdrawal penalty.

Birth or Adoption of a Child

Parents can avoid the tax penalty when they take an early IRA distribution of up to $5,000 following the birth or adoption of their child. The withdrawal must be made within one year of a child’s birth or legal adoption date.