Life circumstances sometimes create a need for funds sooner than expected. If most of your savings are in retirement accounts, you may wonder whether you can access them before age 59½ without facing penalties. The answer depends on the type of account, the source of the funds, and the circumstances surrounding the withdrawal.

This article provides an overview of how early withdrawals from IRAs work, along with some common exceptions to the early withdrawal penalty. It is intended for general informational purposes only and should not be considered tax, legal, or investment advice. Individuals should consult with a qualified financial professional or tax advisor before making any decisions.

Roth IRA Contributions: Flexible Access Rules

One of the more flexible features of a Roth IRA is that contributions — the amounts you have deposited over the years — can be withdrawn at any time, for any reason, without taxes or penalties.

• This applies regardless of how long the account has been open.
• The IRS ordering rules require that contributions are withdrawn before any earnings.

Earnings, however, are treated differently. If withdrawn before age 59½ and before the account has been open at least five years, they are generally subject to ordinary income tax and a 10% early withdrawal penalty, unless an exception applies.

Example:
Dana, age 57, has contributed $100,000 to her Roth IRA over the years, and her account has grown by $75,000 in earnings. If she withdraws up to $100,000, she can do so tax- and penalty-free. Any withdrawal above that amount would be considered earnings and could be taxed and penalized if taken before age 59½ without an exception.

Common Exceptions to the 10% Early Withdrawal Penalty

The IRS provides certain situations in which the 10% early withdrawal penalty may not apply. While the penalty might be waived, ordinary income taxes may still be due on the distribution. Exceptions apply to both IRAs and employer-sponsored plans unless otherwise noted.

Life Events

• Disability: Total and permanent disability as defined by the IRS.
• Death: Beneficiaries may take distributions without the penalty.
• Terminal Illness: Physician certification of a qualifying prognosis.
• Birth or Adoption: Up to $5,000 per parent, per child.
• Domestic Abuse: Lesser of $10,000 (indexed for inflation) or 50% of vested account balance.

Health-Related Needs

• Unreimbursed Medical Expenses: Expenses exceeding 7.5% of adjusted gross income.
• Health Insurance Premiums (IRA only): Available if unemployed and meeting certain conditions.

Education and Housing

• Qualified Higher Education Expenses (IRA only): For tuition, fees, books, and supplies.
• First-Time Home Purchase (IRA only): Up to a $10,000 lifetime limit.

Other

• Rollovers: If funds are deposited into another eligible retirement account within 60 days, no penalty applies.

Key Considerations Before Withdrawing Early

Even if you qualify for an exception to the 10% penalty:

• Income taxes may still apply to taxable amounts.
• Withdrawals can reduce future growth potential and retirement income.
• Certain exceptions apply only to IRAs or only to employer-sponsored plans.

IRS rules and definitions can change, and some exceptions have detailed eligibility requirements. It’s important to confirm the rules before initiating a withdrawal.

Contact Mirus Financial Partners to Learn More

Mirus Financial Partners can help you learn more about the benefits and drawbacks of early withdrawals from IRAs, and may suggest options that may reduce penalties or minimize tax burdens. Options vary by individual and circumstance.

Contact us today to learn more.

This material is for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. The IRS rules described here are current as of this writing but may change. Consult your financial professional and a qualified tax advisor before making decisions regarding early withdrawals from any retirement account.