Options for IRA Hardship Withdrawals

Unlike some employer-sponsored plans, such as 401(k)s, you don't have to prove that you are experiencing a financial hardship before you can take money early from an individual retirement arrangements, or IRA. However, you will pay an extra tax penalty unless an IRS-approved exception applies.

Typical Penalties

Traditional IRAs typically offer you a tax deduction on your contributions, and your money can grow tax-deferred until you take it out. When you take the money out, you pay income taxes on your withdrawals. The IRS normally requires you to keep your money in your IRAs until you turn 59 1/2 or you will face a 10-percent penalty on your withdrawals in addition to your tax bill. However, you might be able to withdraw funds without penalty if you meet the IRS guidelines for certain hardship exceptions.

Medical Expenses or Disability

Two exceptions relate to paying for medical expenses or medical insurance premiums. The first allows you to avoid the penalty on a distribution to cover medical expenses that exceed 7.5 percent of your adjusted gross income -- a hurdle that is scheduled to rise to 10 percent in 2013. For example, for 2012, if your adjusted gross income is $80,000 and you have medical expenses of $7,000, you could take out up to $1,000 penalty-free, although you will have to pay income taxes on your withdrawal. Also, you can avoid the early withdrawal penalty on distributions of any amount if you suffer a permanent disability. The Internal Revenue Service considers you permanently disabled if you can prove that you aren't able to do any gainful activity because of your mental or physical condition and your condition will continue for a long period of time or result in death.

Medical Premiums While Unemployed

You can also avoid the early withdrawal penalty on a distribution up to the cost of your medical insurance premiums while you are unemployed. To qualify, you must have lost your job and received at least 12 weeks of unemployment benefits. In addition, you must have taken the distribution in either the year you received the benefits or the following year, and no more than 60 days after you found a new job.

Higher Education Expenses

The IRS also exempts distributions used to pay for up to $10,000 in qualifying higher education costs from the early withdrawal penalty. Higher education includes college, vocational school and graduate school and qualifying costs include tuition, fees and supplies. If the student is enrolled at least half-time, you can include room and board costs. As long as you're footing the bill, the costs can be for yourself, your spouse, your children or your grandchildren.

Qualified Reservist Distributions

If you're in the military reserves and were called to active duty after Sept. 11, 2001, you can avoid the early withdrawal penalty on distributions while you were on active duty. To qualify, you must have been called up for at least 179 days or an indefinite period of time. This exception applies no matter how much you withdrew.

Roth IRAs

You pay taxes on your Roth IRA contributions when you put the money in, so you can generally withdraw your contributions tax-free and penalty-free at any time. The gains in your account are another matter, though -- you will generally have to pay the 10 percent penalty on top of any incomes taxes you owe on the gains if you withdraw funds before age 59 1/2. But the same hardship exceptions that apply to traditional IRAs apply to Roths.

Photo Credits

  • Comstock/Comstock/Getty Images

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.