Can a Penalty Be Waived on an IRA if Unemployed?

The IRS lets you make penalty-free IRA withdrawals for certain medical expenses.

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As its name suggests, an Individual Retirement Arrangement, or IRA, is supposed to be used as a retirement plan. If you need to make a withdrawal before you turn 59 1/2, you will owe income tax plus an extra 10 percent penalty. However, if you lose your job, there are a few ways to take your money and avoid the penalty. You'll still owe income tax on the withdrawal, but at least you won't owe the extra fee.

Medical Bills

You can use your IRA to help pay some of your medical expenses. If medical bills for the year are more than 7.5 percent of your annual income, you can use your IRA funds to pay the excess bills. This penalty-free withdrawal exists whether you are unemployed or working. When you are unemployed, you can qualify for another exemption. If you have been collecting unemployment benefits for at least 12 weeks, you can use your IRA funds to pay for your health insurance premiums.


If you aren't working because of a disability, you can also take out your IRA money penalty-free. To qualify for this exemption, you must be collecting Social Security disability payments. When you are disabled, you can take money out of your IRA penalty-free for any reason and don't need to document your spending.

Education Costs

You can also use your IRA funds to pay for higher education expenses. This exemption applies whether you are working or unemployed. The penalty waiver applies to paying for your education as well as the education of your children and grandchildren.

Periodic Payments

There is one more way to take money out of your IRA penalty-free. You can request to take substantially equal periodic payments from your IRA. This turns your IRA into an annuity that gives you monthly payments. The IRS doesn't tax this distribution because you are turning your IRA into a stream of income, not making a one-time withdrawal. The IRS calculates your total payment based on your life expectancy. When you start taking periodic payments, you need to keep receiving payments until you turn 59 1/2 or for at least five years, whichever period is longer. This means you'll lose your IRA as a retirement account. However, if you have no where else to turn for income while you are unemployed, you can use the periodic payment option as a last resort.