You can withdraw money early from both a traditional and a Roth IRA without a 10 percent penalty if you're paying medical expenses that aren't covered by insurance. The exception applies to unreimbursed medical expenses for your spouse, your dependents or yourself.
There's a limit on this exception, though. To avoid the 10 percent penalty, the amount you withdraw to cover medical expenses cannot exceed the total cost of the medical expenses minus 7.5 percent of your adjusted gross income for the same tax year [source: IRS]. In other words, the IRS thinks that it's reasonable that you spend at least 7.5 percent of your salary on unreimbursed medical expenses before tapping into an IRA.
The IRS offers an additional exception for folks who are paying for their own medical insurance while unemployed. If you lose your job and collect state or federal unemployment compensation for at least 12 consecutive weeks, you can use IRA money to cover your medical insurance premiums penalty-free. Again, you may owe income tax on those distributions, but you are exempt from the 10 percent early withdrawal penalty.
For lots more information on IRAs, 401(k)s and the IRS, check out the links below.
Author's Note: 10 Reasons Why People Cash Out IRAs Early
Not all money is created — or taxed — equally. This is a lesson that we all have to learn, hopefully not the hard way. If you decide to put money away for retirement in an IRA, 401(k) or other savings plan, it's best to think of that money as untouchable until you're at least 59 ½. As I learned from updating this list — and from my own life experience — it's very tempting to tap into our retirement savings to cover other reasonable or irrational expenses. But if we can keep our hands off our IRA, we'll keep the IRS off our backs and more funds for the future. – D.R.
- Clark, Kim. "Tuition at Public Colleges Rises 4.8%." CNN Money. Oct. 24, 2013. (Feb. 28, 2013) http://money.cnn.com/2012/10/24/pf/college/public-college-tuition/index.html
- CUNA Mutual Group. "IRAs: Roth IRA early withdrawal rules." (Jan. 23, 2011) http://members.cunamutual.com/educationcenter/FinLibView.asp?ART_ID=13681&SITE=99999999
- Dilworth, Kelly. "Rate survey: Interest rates hold steady for ninth straight week." Creditcards.com. Jan. 9, 2013. (Feb. 28, 2013) http://www.creditcards.com/credit-card-news/interest-rate-report-010913-unchanged-2121.php
- Google Finance. "Dow Jones Industrial Average." (Feb. 28, 2013) https://www.google.com/finance?q=INDEXDJX%3A.DJI&ei=QeQsUajCK_TH0AHifA
- Grant, Tim. "Cashing out of your 401(k) should be a last resort." Pittsburgh Post-Gazette. Jan. 28, 2010. (Jan. 21, 2011) http://www.post-gazette.com/pg/10028/1031590-28.stm#ixzz1BuOcZeAl
- Greene, Kelly. "How to Protect 401(k)s and IRAs from Creditors." The Wall Street Journal. May 9, 2009. (Feb. 28, 2013) ttp://online.wsj.com/article/SB124181801239401917.html
- IRS. "Retirement Plan FAQs Regarding Substantially Equal Periodic Payments." (Feb. 28, 2013) http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments
- IRS. "Roth IRAs." (Feb. 28, 2013) http://www.irs.gov/publications/p590/ch02.html
- IRS. "Topic 557: Additional Tax on Early Distributions from Traditional and Roth IRAs." (Feb. 28, 2013) http://www.irs.gov/taxtopics/tc557.html
- IRS. "Traditional IRAS." (Feb. 28, 2013) http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230896
- Orman, Suze. "Suze Answers Your Top Money Questions." (Feb. 28, 2013) http://www.oprah.com/money/Suze-Answers-Your-Top-Questions
- Money Magazine. "When are IRA withdrawals penalty-free?" (Feb. 28, 2013) http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index7.htm
- Pitt, David. "Fidelity: 401(k) Hardship Withdrawals, Loans Up." The Associated Press. Aug. 20, 2010. (Jan. 21, 2011) http://abcnews.go.com/Business/Savings/wireStory?id=11441792
- Steiner, Sheyna. "Penalty-Free 401(k), IRA Withdrawals." Bankrate.com. March 10, 2010. (Jan. 21, 2011) http://www.foxbusiness.com/personal-finance/2010/03/10/penalty-free-k-ira-withdrawals#ixzz1BuGggAEt
- Stephanic, Claire. "Is It Time to Cash Out?" The Motley Fool. Nov. 18, 2008. (Jan. 21, 2011) http://www.fool.com/personal-finance/retirement/2008/11/18/is-it-time-to-cash-out.aspx
- Thomas, Kaye A. "First-Time Homebuyer." Tax Guide for Investors. Jan. 24, 2008. (Jan. 23, 2011) http://www.fairmark.com/rothira/first.htm
- TIAA-CREF. "Bankruptcy Protection for Retirement Plans and IRAs" (Feb. 28, 2013) https://www.tiaa-cref.org/public/advice-planning/education/saving-for-retirement/family-matters/bankruptcy_iras
- Updegrave, Walter. "Should you use an IRA to pay off debt?" CNN Money. (Feb. 28, 2013) http://money.cnn.com/video/pf/2012/09/12/pf-ira-credit-card-debt.cnnmoney/
- UScourts.gov. "Table F - Bankruptcy Cases Commenced, Terminated and Pending During the 12Month Periods Ending December 31, 2009 and 2010." (Feb. 28, 2013). http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2010/1210_f.pdf
- Wang, Jim. "Unlock Your IRA: How to Cash Out an IRA Without Penalty." Bargaineering. Aug. 18, 2009. (Jan. 19, 2011) http://www.bargaineering.com/articles/unlock-your-ira-how-to-cash-out-an-ira-without-penalty.html
HowStuffWorks explains why you might need to go to the Social Security office. Newborn needs SS number, replacement card needed, etc.