The Early Withdrawal Penalty
Amounts withdrawn from an IRA (Individual Retirement Account) are subject to income tax, and if we have not yet reached age 59.5, we will also have to pay a 10 percent early withdrawal penalty.
There are several situations in which we are exempt from the penalty. These are, above all, hardship events, distributions in a series of equal payments, a 60-day loan from an IRA, and using the money to buy a first home, to pay for medical care, for higher education for the taxpayer or his or her children, or for health insurance for the unemployed. These exceptions are discussed below.
Hardship Events
In the following circumstances, you can withdraw money from an IRA before age 59.5 without a penalty:
- The account owner has become disabled. The IRS considers a person disabled if he or she cannot engage in any substantial gainful activity because of a terminal illness or an illness that can be expected to last at least 12 months.
- The owner has died and the money has passed to a beneficiary or to the estate.
- The family has large medical expenses.
This last possibility deserves an explanation. The penalty for early liquidation of an IRA is not charged if we use the money to pay medical expenses not reimbursed by our insurance company. We can withdraw without a penalty the portion of those expenses that exceeds 7.5% of our Adjusted Gross Income (AGI, shown on Form 1040).
For example, if your AGI is $60,000 and your unreimbursed medical expenses are $10,000, the maximum amount you can withdraw without a penalty is $5,500 – the difference between $10,000 and 7.5% of your AGI ($4,500).
Distributions in a Series of Equal Payments
Note: Few people know that you can start drawing on your retirement savings at any age without a penalty if you begin withdrawals in a series of “substantially equal periodic payments” based on life expectancy.
The amount of the payments must be calculated precisely, taking into account the remaining life expectancy of the owner or the joint life expectancy of the owner and his or her spouse. The payments must be made at least annually.
“Substantially equal periodic payments” do not have to continue for the rest of your life. You can stop or change them after five years or once you reach age 59.5 (whichever comes later). You can even close the account entirely.
A 60-Day Loan from an IRA
Usually, when we move an IRA somewhere else (to another bank, mutual fund company or brokerage firm), we ask the financial institutions to transfer it electronically between themselves. But once every 12 months, we can withdraw the funds ourselves and deposit them back into an IRA within 60 days (a so-called rollover), which amounts to a short-term loan. Unfortunately, this move has two drawbacks.
First, the bank may want to withhold 10% for tax withholding. If we want to deposit the money back within 60 days, we have to make up the missing amount out of our own pocket; otherwise it will be treated as an early distribution. Naturally, we will claim the 10 percent withholding on our tax return and get any overpayment back. Withholding is voluntary for people living in the United States but mandatory for those living abroad. For foreigners, banks are required to withhold 30%.
Second, we must return the money on time – within 60 days. Even one day late, and the loan will be treated as a distribution, and we will owe income tax plus the 10% penalty. So borrowing $20,000 can cost us several thousand dollars, depending on our federal and state tax brackets. An unpleasant prospect.
Buying a First Home
The 10 percent penalty does not apply to up to $10,000 used to buy, build or rebuild a first home within 120 days of the distribution date. The home must be the principal residence of the taxpayer, his or her spouse, children, grandchildren or other descendants of the taxpayer or the spouse.
For a home to count as a “first” home, the buyer (and his or her spouse) must not have owned a house or apartment that served as their principal residence in the past two years.
Higher Education Expenses
Money accumulated in an IRA can be used for IRS-approved expenses related to higher education for the taxpayer, his or her spouse, or the children and grandchildren of either spouse. These expenses include tuition, fees and books.
Note: There is no limit here, which means that a young grandfather who has saved hundreds of thousands of dollars in an IRA can comfortably spend the money on further education for the whole family and avoid the penalty. Of course, he will not avoid income tax.
Health Insurance for the Unemployed
We are exempt from the penalty when we use IRA money to pay health insurance premiums for ourselves, our spouse and our dependents, if we meet the following conditions:
- we received unemployment benefits for at least 12 consecutive weeks,
- we withdrew the money in the tax year in which we were unemployed or in the following year, but no later than 60 days after starting a new job.
Note: Even self-employed people qualify for this relief if they meet the above conditions and would have received unemployment benefits had they not been self-employed (the self-employed are not covered by unemployment insurance).
Conclusion
As you can see, in many circumstances you can liquidate an IRA without a penalty. To those listed above we can add the birth or adoption of a child (up to $5,000), emergency personal or family expenses (up to $1,000 a year), withdrawals by a victim of domestic abuse, withdrawals after a federally declared disaster, military service by reservists called to active duty, an IRS levy on the account, or withdrawals from an inherited IRA.
Keep in mind that while withdrawing money is easy, rebuilding your retirement savings is not, because we can deposit only $7,500 a year into an IRA, plus an additional $1,100 for people over fifty (limits for 2026).
The rules governing contributions to, withdrawals from and inheritance of retirement accounts can be complicated. You can read more about IRA, Roth IRA, SIMPLE IRA, Keogh, SEP, 401(k), 403(b), 457(b) and other plans in the book “Amerykańskie emerytury” (“American Pensions”).
Updated October 2026.
