How to Reduce Penalty on Early IRA Withdrawal

You have a few options for reducing or eliminating the early-withdrawal penalty.

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The Internal Revenue Service will slam you with a 10 percent penalty if you take money out of an individual retirement plan too soon. In general, you must be 59 1/2 to avoid the penalty. If your IRA is of the Roth variety, you can always withdraw your contributions at any time without tax or penalty, but you may draw the penalty on earnings. For Traditional IRAs, you may withdraw only nondeductible contributions without tax or penalty. There are a few ways to reduce your the penalty on early IRA withdrawals, however.

Emergency Withdrawals

The IRS offers penalty relief for certain unplanned withdrawals due to unexpected events, such as permanent disability or natural disaster. Reservists may have no warning of a call-up -- they receive the penalty exemption if they serve on active duty for at least 180 days. Sudden medical expenses can occur at any time. You can withdraw penalty-exempt funds in the same year as the expense for unreimbursed medical costs in excess of a percentage of your adjusted gross income. In 2013, that percentage is 10 percent. Should you lose your job, you can pay health insurance premiums in the same year as withdrawal for you or immediate family members without penalty. Additional rules regarding unemployment insurance and reemployment will apply. If you die before age 59 1/2, your beneficiary does not pay the penalty.

Discretionary Withdrawals

You can escape the 10 percent penalty if you choose early withdrawals for certain reasons. If buying, building or rebuilding your first primary residence -- actually, your first one in the last two years -- you have 120 days after withdrawal of up to the $10,000 lifetime cap to sign a binding purchase contract or begin construction. This home can belong to you, your spouse, or a direct ancestor or descendant. The IRS also exempts qualified education expenses for you, your spouse, your children and grandchildren at an eligible educational institution. Your withdrawal must coincide with the year of the expense. You may make one penalty-free distribution in your lifetime to a Health Savings Account. The contribution is tax-deductible and qualified HSA withdrawals are tax-free. The amount cannot exceed your annual maximum HSA contribution. Several conditions and restrictions apply to the withdrawal as well as to expenditures from an HSA, so you might wish to seek expert advice before proceeding.


You avoid the taxes and penalty if you roll over your early distribution into another traditional IRA. You must perform the rollover within 60 days of the distribution or you will owe taxes and penalties. If you miss the 60-day deadline, you might still avoid the penalty if you convince the IRS that your bank or custodian caused the delay.


If you decide you want or require an annuity before age 59 1/2, you can set up substantially equal periodic payments in the year of the early withdrawal and shield from penalty the SEPP amount. A SEPP plan makes payments tied to your expected remaining lifespan. You can choose from several payment calculation schemes that the IRS approves. Once you start taking SEPP, you must continue for five years or until you reach 59 1/2, whichever comes later. Even though penalty-free, your SEPP payments count as taxable income until you reach age 59 1/2. If you own a Roth IRA, your SEPP income isn’t taxable until you exhaust your contributions.

IRS Tax Forms

Your IRA custodian will send you Form 1099-R if you take an early withdrawal. You file IRS Form 5329 if your 1099-R does not correctly describe your penalty exemption, take SEPP or if you take an early Roth distribution from an account that has nondeductible conversions, in which case you’ll also need to file Form 8606. You report rollovers on Form 1040 or one of its variants. File Form 8889 if you have a HSA.