Keep your 10 percent.
Distributions from individual retirement accounts before age 59 1/2 typically trigger a 10 percent early withdrawal penalty. However, the IRA withdrawal rules contain several exceptions to the penalty if you meet certain circumstances or spend the money on specific purchases. Here are 11 ways to avoid the IRA early withdrawal penalty:
Delay IRA withdrawals until age 59 1/2.
Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10 percent penalty. However, regular income tax will still be due on each withdrawal. Traditional IRA distributions are not required until after age 70 1/2.
An IRA withdrawal for medical expenses
IRA distributions used to pay for medical expenses that are not reimbursed by health insurance and exceed 10 percent of your adjusted gross income are not subject to the early withdrawal penalty.
An IRA withdrawal to pay for health insurance
If you lose your job and collect unemployment compensation for 12 consecutive weeks, you can take penalty-free IRA distributions if you use the money to pay for health insurance for you or your spouse or dependents. To qualify for this penalty exception, you must take the distribution in the year you received the unemployment compensation or the following year and before you have been re-employed for 60 days or more.
An IRA withdrawal for college costs
Penalty-free IRA distributions are allowed to pay for college, including tuition, fees, books, supplies and equipment. Room and board also count if the individual attending college is at least a half-time student. Qualifying institutions include colleges, universities and vocational schools eligible to participate in federal student aid programs. However, IRA distributions are considered taxable income and could reduce your eligibility for financial aid.
An IRA withdrawal for a first home purchase
You can withdraw up to $10,000 ($20,000 for couples) from an IRA to buy or build a first home without incurring the early withdrawal penalty. To qualify for the exemption, you must not have owned a home for the two years preceding the home purchase. If the purchase or construction of your home is canceled or delayed, put the money back in your IRA within 120 days of the distribution to avoid the penalty.
An IRA withdrawal to pay for a disability
People with severe physical and mental disabilities who are no longer able to work can take IRA withdrawals without penalty if they can get a physician to sign off on the severity of the condition.
An IRA withdrawal for military service
Members of the military reserves who take an IRA distribution during a period of active duty of more than 179 days do not have to pay a 10 percent penalty on the amount withdrawn.
Set up an annuity.
IRA withdrawals taken as a series of annuity payments are not subject to the early withdrawal penalty. The use of an IRS-approved distribution method and at least one withdrawal annually are required to avoid the penalty. The payments are calculated based on your life expectancy or the joint life expectancies of you and your beneficiary, and generally require professional assistance to calculate. If you don’t consistently withdraw the correct amount over the appropriate number of years, penalties could be applied.
A Roth IRA withdrawal
A Roth IRA early withdrawal often has fewer restrictions. You may be able to withdraw your contributions, but not the earnings, from a Roth IRA that is at least five years old without incurring the early withdrawal penalty.
An inherited IRA
If you inherit a traditional IRA before age 59 1/2, you can take penalty-free withdrawals, but will need to pay income tax on each distribution. However, if you inherit an IRA from your spouse and elect to treat it as your own, distributions before age 59 1/2 will be subject to the early withdrawal penalty.
Leave the money in a 401(k).
Workers who leave their jobs in the year they turn 55 or older can withdraw money from their 401(k) without having to pay the 10 percent penalty. But if that money is rolled over to an IRA, you will have to wait until age 59 1/2 to avoid the penalty, unless you qualify for one of the other early withdrawal penalty exceptions.
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