Early Withdrawal From IRA (Traditional): 9 Ways To Avoid the 10% Penalty

A distribution is considered an early distribution if it is made before you reach the age of 59 1/2 years. When you make an early withdrawal from IRA (Traditional), the funds will be included in your gross income and you will have to pay taxes on that.

Please note that all distributions are subject to your regular tax no matter what reasons you have for making the withdrawal.

In addition to the regular tax,  you have to pay 10 % penalty on the distribution of any assets (money or other property) unless the reason for the distribution qualifies as an exemption.

Below are the nine ways you can take money out from your traditional IRA before age 59 1/2 and avoid the 10% penalty on early withdrawal from IRA (Traditional):

1. You are disabled.

When you are disabled, there is a high probability that you may not be able to work. Because of this, the IRS is allowing you to withdraw your traditional IRA funds without incurring the 10% penalty. You are considered disabled if you cannot perform any substantial gainful activity due to your physical or mental condition. In order to qualify for the disability exemption, you must provide proof such as a physician statement indicating that you have a physical or mental condition that could result in death or last for a long and indefinite period of time.

2. You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

Usually, if you are itemizing your deduction using Schedule A, medical expenses are one of the items that you can deduct. However, your qualified medical expenses are subject to limitations of 7.5% of your adjusted gross income (AGI) – this means that your medical expenses deductions are reduced by 7.5% of your AGI. See the article Schedule A: Medical Expenses You Can Deduct for additional information on the medical expenses deductions.

When you make an early withdrawal from IRA equivalent to the medical expenses that you would deduct on your Schedule A 1040, then you do not have to pay the 10% penalty

  • Example: Assuming that your adjusted gross income is $100,000 and your qualified medical expenses is $10,000, you can only deduct $2,500 [$10,000 less  $7,500 (7.5% X $100,000)] on your 1040 Schedule A. Now, if you withdrew $2,500 from your traditional IRA, then you do not have to pay 10% penalty. On the other hand, if you withdrew $4,000 to be used for your medical expenses, then you would need to pay the 10% penalty on the $1,500 since only the $2,500 is exempted from the penalty.

Please also note that you do not have to itemize your deductions to take advantage of this exception to the 10% early withdrawal penalty.

3. You inherited the traditional IRA from a deceased IRA owner.

The rules are quite different if you inherit the traditional IRA from a deceased IRA owner. If this is the case, the assets in the traditional IRA can be distributed to you without having to pay the 10% additional tax even if the owner has not reached the age of 59 1/2 years before his/her death.

4. You are receiving distributions in the form of an annuity.

Another way to receive the distribution of a traditional IRA without incurring the early withdrawal penalty is if the distributions are received in the form of annuity, which is a series of substantially equal payments over your (or your beneficiaries) life expectancies as determined by the IRS. You must use an IRS-approved distribution method such as minimum distribution, fixed amortization and fixed annuity. Moreover, you must take at least one distribution annually for this exception to apply.

5. You use the distributions to buy, build, or rebuild a first home.

You can withdraw up to $10,000 from your traditional IRA without having to pay the 10% penalty on the early withdrawal from IRA if you use the proceeds to buy, build, or rebuild a first home that will be used as your principal residence. You are considered a first-time homebuyer if you have no real estate ownership within the past two years ending on the date you purchased your home.

6. The distributions are not more than your qualified higher education expenses.

Having qualified higher education expenses provides a lot of tax breaks to the college students and immediate families. If you withdraw traditional IRA funds and used it to pay for qualified higher education for yourself, spouse or your dependents, you do not have to pay the 10% penalty on the traditional ira early withdrawal for any qualified higher education expenses not covered by tax-free resources such as Coverdell accounts, Pell grants, scholarships, state grants, veteran educational assistance, etc.  A qualified higher education expenses are tuition, registrations, fees, books and supplies, and school equipment required for enrollment attendance at a qualified institution (college, universities, trade schools, community college).  Room and board, meals, and transportation do not.

  • Example – The total tuition and fees, books, and supplies that you paid for your college student child is $20,000 for the tax year. However, your child received a scholarship of $5,000 from the school for excellent merit performance and this was applied automatically to the tuition fees. Because of this, the amount of qualified expenses that will be exempt from the 10% penalty is reduced to $15,000 if you decide to withdraw money from your traditional IRA funds to pay for your child’s education.

7. The distribution is a qualified reservist distribution.

If you make a distribution from a traditional IRA and you are a qualified  United States military reservist (Army, Air Force, National Guard, Coast Guard, Marines, Navy, Air National Guard, and Reserve Corp of Public Health service), you may not have to pay the penalty on early withdrawal from IRA. You are considered a qualified reservist if you meet the following criteria:

  • You were ordered or called to active duty after September 11, 2001, OR because you are a member of a reserve corp for a period of more than 179 days or an indefinite period of time.
  • The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period.
  • The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement.

8. You used the funds to pay for medical insurance when you become unemployed

If you make an early withdrawal and used the funds to pay for the medical insurance for your family, you may not pay the 10% penalty for that if you become recently unemployed. However, you can only avoid the penalty on the early withdrawal from IRA (traditional) if all of the following situations also apply:

  • You received  unemployment benefits for 12 consecutive weeks from the government
  • You withdraw the funds either on the year of your unemployment or the following year
  • You withdraw the funds no later than 60 days after you have found employment

9.) You used the funds to pay for an IRS levy on a qualified plan

If the IRS places a levy against a qualified retirement plan, then any taxes due can be paid back using a penalty free early withdrawal from IRA (Traditional).

Source: Publication 590


  1. Also note, the home buying rule is slightly different for ROTH IRA – must’ve been opened atleast 5 years prior.

    In that regard, Traditional trumps Roth!