We live in a world where stuff happens.

Air conditioners break, kids need braces, and dogs need heart worm medication.

When the unexpected occurs and you suddenly find yourself in a cash needy situation, one place that investors are tempted to raid is their Individual Retirement Accounts (IRA’s).

If you don’t have a 401k that you can borrow from, your credit cards are tapped, and your emergency fund is in need of just that -an emergency, then tapping your IRA might be the only option.

This is a last resort, especially if you haven’t reached the age of 59 1/2.  Did you know, however, that there are ways that you can withdrawal your IRA without penalty?

Yes, that’s right.  Uncle Sam was generous to allow you to touch your IRA under special circumstances.  If you need the money for one of these reasons, then you might be in luck.

Before we continue, some words of caution. Just because you can touch your retirement money with no penalty, doesn’t mean that you don’t have to pay the tax. If you’re withdrawing money out of a Traditional IRA, you’ll have to pay ordinary income tax.   There’s no way getting around that.

If you have a Roth IRA, however; you can pull your contributions at any time.  The earnings have an age (59 1/2) and five year test they have to meet before you can have access to those funds penalty free. Then there’s the issue of compounding interest.  If you keep taking money out of your IRA, there’s less to “compound” potentially leaving you short at retirement.

Paying Those Doctor Bills

How to tap your IRA with no penalty
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An unexpected visit to the hospital can be a major financial blow to your nest egg.  If your hospital bill is currently greater than 10% of your income, that portion that is above that will be penalty free.

Health Insurance For the Unemployed

Lost your job and down in the dumps? Further complication comes when you’re trying to figure out how you are going to pay for your health insurance.  If you find yourself being recently let go and so as long as you receive unemployment for 12 consecutive weeks, then you are allowed to tap your IRA to pay for health insurance premiums for yourself and your family.

Higher Learning

How to tap your IRA with no penalty
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School days, school days, Good old golden rules days….

If you or someone in your family is planning on going to school, you can use your IRA money penalty free to help with the cost to include: tuition, fees, books, supplies, room and boar, and required equipment. To qualify, you (or they) must be going to school at least half-time to a college, university or a vocational school that accepts federal financial aid.

Note from me: I highly discourage using your IRA money to pay for your kids college education.  It’s my belief that you need to take care of #1 (that’s you) and tapping your retirement money is a recipe for financial hazard.

Home Shopping

If you are a first time home-buyer, you will have the option of using your IRA to live out the American dream.  Each individual is allowed to pull $10,000 ($20,000 if you are married) to go towards

According to Fairmark.com, here are the requirements that you must meet:

  • The purchase must be a principal residence.
  • The person for whom it is a principal residence must be the owner of the IRA or a family member (within limits).
  • The person for whom it is a principal residence must be a “first-time homebuyer” (generally someone who has not owned a home in the previous two years).
  • The purchase must cover “qualified acquisition costs.”
  • The purchase must be made within the applicable time limit.

This tax loophole can also be used to purchase a first home for a parent, child, or grandchild.


If and when someone has an accident or is diagnosed with a condition that gives them a permanent disability, it can be quite scary when it comes to paying the bills. If you have a permanent disability you can withdraw from your 401k early and get the money you need. You’ll have to provide a disability letter to your 401k custodian so that they will not hit you with the 10% penalty.  You read more about 401k hardship withdrawal rules in another post.

Early Retirement Income

Another more complex strategy to try and avoid the 10% penalty is the rule of 72(t).  The rule of 72(t) states that withdrawals from your 401k have to be  “substantially equal periodic payments.  You must use one of the three methods that the IRS has determined and then take your payment on a set schedule for a specific time period.

It is required that you take those payments for either 5 years or when you turn 59 1/2 , whichever comes later. For example, if you start taking your payments at the age of 52, then you must do so for 8 years. Someone who starts at 57, must do so till the age of 62.

Please note: Once a payment schedule is established, payments modified in any way will be subject to 10% early distribution penalty, plus interest penalty.  72(t)strategy may not always be suitable.  An advisor, or a tax or legal professional, can help identify if this is the best strategy for you.

If you owe the IRS

If the Tax Man comes knocking at your door, he doesn’t care where the money comes so as long as you pay it: cash, check, or even credit card.   And if it’s your IRA, you’re allowed to take money penalty free to settle your tax debt.

Military service

How to tap your IRA with no penalty

Military reserve members may also be eligible to take early IRA withdrawals. To qualify for the tax exemption, you must have been ordered or called to active duty after Sept. 11, 2001, for more than 179 days, and the distribution must be made during the active-duty period. The Army, Naval, Marine Corps, Air Force, and Coast Guard reserves are among the military branches whose members qualify.

Till Death Do Us Part

Death would seem to be the ultimate hardship and when an IRA account holder dies, the beneficiaries can take withdrawals from the account without paying the 10 percent penalty. However, the IRS imposes restrictions on spouses who inherit an IRA and elect to treat it as their own. They may be subject to the penalty if they take a distribution before age 59½.



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Comments | 3 Responses

  1. says

    I am looking at unconventional means to manage my weak financial position – 53 years old, around $60K in gold IRA, one kid about to enter college/another in 3 to 4 years, starting over on a mortgage due to a divorce (debt equals owed). I am looking at Bank On Yourself, and one advisor suggested something about a 72t distribution on my gold assets, but wasn’t sure it would work, so I Googled it and found your web site. I’m not looking for a miracle, or maybe I am in this economy. I work very hard as a self-employed remodel contractor. Any thoughts?

    • says

      @ Cary That’s a tough call without knowing more of your situation. With $60k in your IRA, I hardly think doing the 72t distribution would be worth it.

  2. Joan Austin says

    I was wondering if I could pose this question and get an answer. My elder sister has a simple IRA. She is 85 years old until next Oct. Every year since turning 70 1/2 she has had the required IRS RMD taken out. For 2014 she took a lot less then she needed. When asked why, I was told she thought she took enough so she didnt want to take more and had told the bank to stop taking the monthly amount out and not to place it in her bank acct for the same reason she gave me. Not sure why the bank didnt tell her she had to take out more but they never did. As you see she is getting up there in age and last year someone bumped, hit, whatever her at a cross walk with their car. She was thrown down, hit her head and back and has not been quiet the same since. Though she probably wont admit it. Anyway I need to know what told do. The IRS Form 5329 and Instr. say the penalty is 50% of the RMD not taken as a penalty? Wow. So say she didnt take 10000 then does that mean she owes 5000. Thats nuts. It does say they might waive the penalty or a portion if she can prove it was due to reasonable error? How does one prove that?

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