19? No, 22 Ways to Withdraw IRA Funds Without Penalty

Photo credit: dido

We’ve covered a lot of ground on how you can access your IRA funds in this blog. Over time I have developed the following list of the ways to withdraw IRA funds without penalty. The penalty for early withdrawal of IRA funds is 10% of the withdrawal, unless one of the exceptions is met.  This list is for Traditional IRAs only. For a similar list regarding early withdrawal from a 401k plan, follow this link. This list has been updated with the Secure 2.0 exceptions that came into law in 2022, so that there are now 22 ways to withdraw funds from an IRA without penalty.

It is key to note that, although these exceptions allow the distribution of funds without triggering the 10% penalty, in most cases the account owner is still liable for the ordinary income tax on distributions.  Consult your tax advisor for additional information.

19 22 Ways to Withdraw IRA Funds Without Penalty

We’ll start with the obvious:

1.  Normal distribution – take your withdrawal after age 59½
2.  Before Tax Due – Withdraw annual contributions before the due date of your tax return – an example would be to withdraw your 2023 contributions (and any associated growth) before April 15, 2024.
3.  Excess Contributions – Withdraw excess contributions before the due date of your tax return – if you discovered that you had contributed more than allowed (due to income limits or error) you are allowed to remove the excess and any associated growth before the tax return is due for the year.
4.  Required Minimum Distributions – technically this one is covered by #1 above for most circumstances, but it also covers the case where RMD is required of a person who has inherited an IRA, regardless of age.

Now we’ll move into some of the not-so-obvious methods, starting with SOSEPP.

Series Of Substantially Equal Periodic Payments

This is the classic Section 72(t) method for withdrawing funds without penalty.  Essentially you agree to continue taking the same amount from your IRA for the greater of five years or until you reach age 59½. There are three methods of SOSEPP:

5.  Required Minimum Distribution method – uses the IRS RMD table (usually Table III) to determine your Equal Payments.
6.  Fixed Amortization method – in this method, you calculate your Equal Payment based on one of three life expectancy tables published by the IRS.
7.  Fixed Annuitization method – this method uses an annuitization factor published by the IRS to determine your Equal Payments.

Additional Section 72(t) methods for taking distribution from your IRA include:

8.  Qualified Higher Education Expenses – you can withdraw your IRA funds to help pay for college, within limits.
9.  Death – If you die, your beneficiaries are able to take distributions from your IRA without penalty, including RMDs (see #4 above).
10.  Disability – If you are “totally and permanently disabled” by IRS definition, you can take distributions from your IRA without penalty.
11.  High Unreimbursed Medical Expenses – for yourself, your spouse, or your qualified dependent.  If you face these expenses, you are allowed to withdraw a limited amount (the actual expenses minus 7.5% of your AGI) without penalty.
12.  Medical Insurance Premiums – if you’ve lost your job and receive unemployment compensation, you are eligible to withdraw an amount to pay for your medical insurance premiums (with some additional limits).
13.  First-Time Home Purchase – up to $10,000 ($20,000 for a couple) of the costs of buying, building, or re-building a “first home”.  First home is determined by whether you had no present interest in a main home for two years prior to the purchase.

And lastly, here are a few additional ways that you can withdraw your IRA funds without penalty:

14.  Qualified Reservist – If you were called to duty after September 11, 2001 and served for at least 6 months, you are allowed to make a withdrawal from your IRA during your active duty period without penalty.
15.  Divorce – although not a particular IRS regulation, multiple Private Letter Rulings have allowed divorced parties to “split” an IRA into two separate IRAs, both with the original restrictions on distribution. For an IRA this is known as a transfer incident to divorce, while in a 401k plan it’s known as a QDRO.
16.  Roth IRA Conversion – when you convert your funds from a Traditional IRA to a Roth IRA, although you pay tax on the distribution, there is no 10% penalty applied.
17.  Rollover – using the 60-day period, you are eligible to have access to your funds without penalty as long as the rollover is completed and the distributed funds are deposited into an IRA (the same or a new account) within 60 days.
18.  Payment to Advisor/Investment Manager – you are allowed to authorize your custodian to pay your Advisor or Investment Manager from your IRA funds any fees for managing your IRA. This includes transaction fees and annual custodian fees.
19. Periodic Temporary “Disaster Relief” provisions – from time to time, as the situation merits, Congress will enact special legislation allowing individuals impacted (primarily) by natural disasters to access IRA funds without paying the 10% penalty. Notable examples of such a recent provision was for victims of Hurricanes Harvey and Irma. With the passage of Secure 2.0 in 2022, this exception has been made permanent. Under this exception, an individual can take a penalty-free withdrawal of up to $22,000 total from an IRA or other retirement plan if the individual’s primary residence is located within a federally-declared disaster area, an economic loss was sustained, and the withdrawal is taken within 180 days of the first day of the disaster or later if the disaster was declared later. The withdrawal can be repaid at any time during the ensuing three years, and if not repaid the income can be spread (recognized) equally over three years.
20. Terminal Illness – beginning in 2023, if an individual is certified by a physician as having a terminal illness, which an illness that is reasonably expected to result in death in 84 months or less, an exception to the 10% penalty is granted. There is no maximum, and like the disaster relief exception, can be paid pack within three years. The difference is that the income, if not paid back, must be completely recognized in the year of the distribution.
21. Domestic Abuse – beginning in 2024, victims of domestic abuse by a spouse or domestic partner that occurred within the previous 12 months are allowed an exception to the 10% penalty. This exception is allowed on the lesser of $10,000 or 50% of the vested balance of the account. These distributions can likewise be repaid over the following three years, but if not repaid must be recognized as taxable income in the year of the distribution.
22. Financial Emergency – Effective in 2024, in the event of an “unforeseeable or immediate financial need relating to personal or family emergencies”, up to $1,000 can be withdrawn without penalty. This exception, if taken, negates the option for the following three years unless the original distribution is repaid, or future contributions exceed the amount of the previous emergency distribution.
23. Birth or adoption – After the birth of a child, or after an adoption is finalized, each parent is allowed to withdraw up to $5,000 from his or her IRA or retirement plan without penalty. The withdrawal must be after the birth or adoption, and is allowed penalty-free up to 12 months afterwards.

Now, did your list have 25 different ways?  Perhaps I’ve overlooked some… let me know if you have other ways in your list that folks can withdraw IRA funds without penalty. Let me know what you think!