What Are the Exceptions to the 10% Early Withdrawal Penalty?

What are the exceptions to the 10 early withdrawal penalty

Early withdrawal penalties of 10% can cost you plenty when saving for retirement, yet there may be exceptions to this penalty.

Avoid penalties if withdrawing funds to pay medical or education expenses, satisfy an IRS tax levy, or buy your first home.

Medical Expenses

The IRS permits penalty-free withdrawals from IRAs to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income each year. This exception covers costs like annual checkups, prescriptions and most dental and vision care; it doesn’t however cover elective procedures like plastic surgery that you may choose not need.

Another medical exception involves Substantially Equal Periodic Payments. These payments must be distributed over your life expectancy or that of you and your beneficiary and must at least annually follow one of three complicated IRS-approved methods until age 59 1/2 has been reached, whichever comes first.

As long as you meet certain conditions, penalties-free withdrawals from an IRA can also be used to pay health insurance premiums during periods of unemployment for up to 12 weeks, and under new tax law penalty-free withdrawals can even be made to cover costs related to childbirth or adoption.

Education Expenses

Withdrawals from retirement accounts typically incur taxes at ordinary income rates and incur an early withdrawal penalty of 10% if taken before age 59 1/2. There are exceptions that allow you to avoid this tax penalty altogether, however.

Your IRA allows for early withdrawals without penalties if they’re used to buy a first home for yourself, your spouse, your children or grandchildren if you satisfy IRS definition of first-time homebuyer. This exemption only applies if meeting their criteria is satisfied.

Your IRA money can also help you avoid penalties by paying qualified education expenses with it, such as tuition, fees, books, educational supplies and equipment for disability services as well as room and board if attending at least half-time. Your expenses must cover you or any family members attending an eligible educational institution – such as accredited public, private and nonprofit colleges/universities/vocational schools that qualify for federal student aid programs.


If you become disabled and must access your retirement savings before age 59 1/2, IRS rules allow certain exceptions that reduce or waive the 10% penalty. But you’ll need proof of disability. Among them: withdraw funds to buy or build your first home; cover unreimbursed medical expenses exceeding 7.5% of adjusted gross income; purchase life insurance policies or pay federal income tax due on distributions from qualified plans (IRA and employer-sponsored plans) due to IRS levy.

Custodians will report such distributions on Form 1099-R and will typically enter code “3,” Disability, in Box 7. You will then file a claim with the IRS that meets their required criteria to avoid penalties; however, some financial organizations have started reporting them without using code “3,” simply reporting the distribution in Box 7.


Many people rely on tax-advantaged retirement savings accounts like IRAs and 401(k) plans as tax-efficient tools for post-retirement savings, but if funds need to be accessed prior to age 59 1/2 they typically incur a 10% penalty from the IRS; although certain circumstances can waive it entirely.

Medical Expenses

An IRA allows you to withdraw funds without incurring the 10% penalty for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, such as birth or adoption expenses. Furthermore, in certain circumstances you can also take withdrawals penalty-free in order to pay health insurance premiums while unemployed.

Other exceptions to the penalty include reaching age 59 1/2, death, disability, making substantially equal periodic payments (commonly known as 72(t) payments), fulfilling an IRS tax levy and first-time homebuyer expenses. To qualify, an appropriate form must be filed with the IRS detailing why taking penalty-free withdrawal is beneficial to them.

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