10 Reasons Why People Cash Out IRAs Early


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Paying Medical Expenses
Grigor Sarkisyan continues his protest at the offices of Cigna Insurance after the death of his daughter Nataline from leukemia complications. He contends that Cigna improperly refused to pay for the liver transplant that could have saved her life. MARK RALSTON/AFP/Getty Images

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.

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