If you take money out of a retirement account (IRA, 401(k), 403(b), etc.) before reaching the age of 59½, you typically must pay income taxes on the withdrawal plus an additional 10% early withdrawal tax unless an exception applies.
If they apply, these exceptions may save you the 10% penalty if you have to tap into your retirement accounts early.
Death or Disability- If someone in your family becomes permanently disabled, your retirement may be the last place that you want to draw funds. There are options to get money out of your IRA penalty free should disability or death happen in your family.
Substantial Equal Periodic Payments (sometimes referred to as Regulation 72t)- There are several methodologies to figure out what your agreed upon annual payment from your IRA will be each and every year, but the basic premise is that you take out a ‘required’ distribution for a minimum of five years and you can escape paying the 10% tax on those distributions. This can be a creative strategy for those retiring at 50 or 55 and needing income from their IRA’s.
60 Day Rule- It is best to do a direct transfer from one IRA to another if you are moving financial institutions. However, if you need money from your IRA and you are certain that you can replace it quickly, the IRA allows you to take money out of your IRA and pay no 10% penalty as long as you can essentially replace an exact replica of the money within 60 calendar days. You are only allowed to do this once in a rolling 12-month period (e.g. it is not per calendar year).
Qualified Education Expenses- If you use retirement funds to cover educational expenses not covered from financial aid, tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution may be exempt from the 10% penalty. The exception includes expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Be sure to check into the details of the rules, but parents overlook this strategy often when it comes to paying tuition bills.
Buying A First Home- For what the IRS determines as ‘qualified home buyer’, you can take up to $10,000 out of your IRA without paying the 10% penalty on the IRA distribution. Pay attention to the rules around this one, but it is something to consider for younger individuals or families looking to purchase their first home.