Legitimate Ways to Avoid a 10% Penalty Tax on Early IRA Withdrawals

In a pinch, you may need to take some money out of your traditional IRA (or IRAs) before you reach age 59½. The IRS refers to these distributions as "early withdrawals." While most traditional IRA withdrawals are at least partially taxable, the taxable portion of withdrawals taken before age 59½ will also be hit with the 10% early withdrawal penalty tax — unless an exception applies. Here are 15 exceptions that are allowed under the current tax rules.

1. Withdrawals that Count as SEPPs

Substantially Equal Periodic Payments (SEPPs) are sometimes called "annuitizing the account," because you must receive a series of annual payouts. If you have several IRAs, you don't need to take SEPPs from them all. Instead, you can annuitize one or more accounts to generate annual SEPPs that are big enough to meet your cash needs. You can leave your other tax-advantaged retirement accounts untouched.

Important: Complying with the SEPP rules can be complicated. You may want to involve your tax pro if you're considering this option.  

2.  Withdrawals for Medical Expenses in Excess of 7.5% of Adjusted Gross Income (AGI).

You're currently allowed to claim itemized deductions for medical expenses only to the extent that they exceed 7.5% of your adjusted gross income (AGI). IRA withdrawals up to the amount of that excess are exempt from the 10% penalty tax, regardless of whether you itemize deductions on your federal tax return.

3.  Withdrawals for Qualified Higher Education Expenses

You can take early penalty-free IRA withdrawals to the extent of qualified higher education expenses paid during that same year.  However, the qualified expenses must be for the education of yourself as the account owner or your spouse, or your child, stepchild, or adopted child.

4.  Withdrawals for Qualified Home Acquisition Costs

You can take penalty-free early IRA withdrawals for money spent by you as the account owner within 120 days to pay for qualified acquisition costs for an eligible principal residence. However, there is a lifetime $10,000 limit on this exception. The principal residence can be acquired by you as the account owner or your spouse or certain relatives. The buyer (and the buyer's spouse if applicable) must not have owned a principal residence within the two-year period that ends on the acquisition date.

5.  Withdrawals for Births or Adoptions

You can claim penalty-free treatment for a qualified birth or adoption distribution taken before age 59½. That means a distribution made during the one-year period beginning on the date when an eligible child is born or the date when the legal adoption of an eligible adoptee is finalized. An eligible adoptee means any individual (other than your child or your spouse's child) who is under age 18 or is physically or mentally incapable of self-support. The maximum penalty-free qualified distribution for any eligible birth or adoption is $5,000.

6.  Withdrawals for Emergency Expenses

For early withdrawals taken in 2024 and beyond, a new exception applies to so-called emergency personal expense distributions, as defined by the beloved Internal Revenue Code. You can't use this exception more than once a year, and the maximum penalty-free withdrawal under this exception is $1,000.

7.  Withdrawals for Disaster Recovery

You can take penalty-free qualified disaster recovery distributions, as defined. The aggregate amount that can be treated as qualified disaster recovery distributions over the years for any qualified disaster is limited to $22,000.   

8.  Withdrawals after Disability

This exception applies to early withdrawals taken by an IRA owner who's determined to be physically or mentally disabled to the extent that the owner can't engage in his or her customary gainful activity or a comparable gainful activity. In addition, the disability must be expected to lead to death or to be of long or indefinite duration. However, the disability doesn't have to be expected to be permanent to satisfy the preceding requirement. 

9.  Withdrawals for Terminal Illness

This exception applies to early withdrawals taken by a terminally ill individual, as defined.   

10.  Withdrawals after Death

This exception applies to amounts paid to a deceased IRA owner's estate or account beneficiary on or after the date of the owner's death. In other words, under this exception, amounts withdrawn from an IRA after the account owner's death will always be free of the 10% penalty tax.

This exception isn't available for funds rolled over into a surviving spouse's IRA or if the surviving spouse elects to treat the inherited IRA as his or her own account. If the surviving spouse needs some of the inherited funds, they should be left in the inherited IRA (that is, the one still treated as being set up for the deceased spouse). Then the surviving spouse can withdraw the needed funds from the inherited IRA without any 10% penalty.     

11.  Withdrawals by Military Reservists Called to Active Duty

This exception applies to certain early IRA withdrawals taken by military reserve members who are called to active duty for at least 180 days or for an indefinite period.  

12.  Withdrawals for Health Insurance Premiums during Unemployment

Another exception is available to an IRA owner who has received unemployment compensation payments for 12 consecutive weeks under any federal or state unemployment compensation law during the year in question or the preceding year. If this condition is satisfied, the IRA owner's early withdrawals during the year in question are penalty-free up to the amount paid during that year for health insurance premiums to cover the account owner and his or her spouse and dependents.

13.  Withdrawals for Domestic Abuse Victims

For early withdrawals taken in 2024 and beyond, another new exception applies to eligible distributions made to domestic abuse victims, as defined. This exception is subject to a $10,000 limitation, adjusted for inflation after 2024.

14.  Withdrawals for IRS Levies

This exception applies to early IRA withdrawals taken to pay IRS levies against the account. Note that it's unavailable when the IRS levies against the IRA owner (as opposed to the IRA itself), and the owner then withdraws IRA funds to pay the levy.   

15.  Withdrawals for Long-Term Care

For early IRA withdrawals taken after December 29, 2025, a new exception will apply to qualified long-term care distributions, as defined. If you take money out of a traditional IRA to pay for long-term care before the effective date, you'll still be subject to the 10% penalty tax.

Bottom Line

After you reach age 59½, all the exceptions to the 10% early withdrawal penalty tax become moot. In other words, you can withdraw money at any time and for any reason without having to worry about the 10% penalty tax.

The subject of how early IRA and qualified retirement plan withdrawals are taxed isn't simple, and this article doesn't cover every detail of how to qualify for these exceptions. Before taking early withdrawals, contact your advisor to discuss whether you meet the full requirements for an exception to 10% penalty tax.