Borrowing From an IRA: What’s Allowed and What It Costs

Thinking about using IRA money to cover a short-term need? IRAs are designed to grow for retirement, but there are narrow situations where you can access funds early—sometimes without the 10% penalty. Understanding the rules is key to avoiding unexpected taxes and preserving your long-term savings.

Generally, withdrawals after age 59½ avoid the additional 10% early distribution tax. Before that age, pulling cash out typically triggers a penalty and ordinary income taxes, unless you qualify for an exception. The specifics can vary by IRA type and timing.

For example, most early distributions from Traditional or SEP IRAs are subject to a 10% penalty. SIMPLE IRAs are stricter early on: distributions within the first two years of participation can incur a 25% penalty, dropping to 10% after that window.

Penalty Exceptions for Early IRA Withdrawals

If you must access funds before 59½, the IRS permits exceptions that waive the 10% penalty. You’ll still generally owe income tax on taxable amounts, but you can avoid the extra penalty when the following conditions apply.

1. Unreimbursed Medical Expenses

Distributions may be penalty-free to the extent your out-of-pocket medical expenses exceed a percentage of your adjusted gross income (AGI). The qualifying amount must be paid in the same tax year as the withdrawal.

Example: If your AGI is $100,000 and your qualifying medical bills are $15,000, only the portion above the applicable AGI threshold can qualify for the exception.

2. Health Insurance Premiums During Unemployment

If you’re receiving unemployment compensation and need help paying health insurance premiums, certain distributions can avoid the 10% penalty. This exception is limited and has timing requirements, so review the rules before withdrawing.

3. Higher Education Costs

Penalty-free distributions can be used for qualified higher education expenses for yourself, your spouse, children, or grandchildren. Eligible costs include tuition and certain required expenses at qualifying institutions.

Common qualified expenses include:

• Tuition and mandatory fees
• Books and required course materials
• Necessary equipment and supplies
• Other expenses the institution deems required for enrollment

4. Permanent Disability

If you’re deemed permanently disabled under IRS criteria, early distributions can be exempt from the 10% penalty. Your custodian may request documentation supporting the disability determination.

5. Inherited IRAs

Beneficiaries of inherited IRAs can generally withdraw funds without the 10% early distribution penalty. Different rules apply if you are a spouse who treats the IRA as your own, so confirm your status before taking money out.

6. First-Home Purchase, Build, or Rebuild

You can withdraw up to a $10,000 lifetime total for a qualified first-home purchase, construction, or reconstruction without the 10% penalty. You’re considered a first-time homebuyer if you haven’t owned a principal residence in the last two years.

7. Substantially Equal Periodic Payments (SEPP)

By committing to substantially equal periodic payments calculated using IRS-approved methods, you may take penalty-free withdrawals for at least five years or until age 59½, whichever is longer. SEPP schedules are strict—changing them early can trigger penalties.

8. IRS Levy

If the IRS levies your IRA to collect unpaid federal taxes, the 10% penalty does not apply to the amount taken by levy. Withdrawing funds yourself to pay the tax bill is not the same as a levy and could still be penalized.

9. Qualified Reservists on Active Duty

Eligible distributions to military reservists and National Guard members called to active duty for at least 179 days (after specified dates) can avoid the 10% penalty. In some cases, you may later recontribute these amounts within allowed timeframes.

10. The 60-Day Rollover Rule

Need temporary access? A distribution can be redeposited into the same or another IRA within 60 days and be treated as a rollover, avoiding tax and penalty. You get only one IRA-to-IRA 60-day rollover per 12-month period across all your IRAs, so use this carefully.

Tax Implications

Early distributions that don’t qualify for an exception typically face a 10% penalty on the taxable amount, in addition to ordinary income taxes. SIMPLE IRAs can incur a 25% penalty during the first two years of participation.

Early Withdrawal Penalties on a Traditional IRA

To estimate the penalty, multiply the taxable portion of your early distribution by 10%. For instance, a $10,000 early taxable withdrawal may add a $1,000 penalty, plus the distribution is included in your taxable income.

Note: State taxes can also apply. Consult a qualified tax professional to calculate your total tax and penalty exposure before withdrawing.

Alternatives to Borrowing from an IRA

Before reducing your retirement balance, consider options that preserve tax-advantaged growth. A little planning can help you cover urgent needs without sacrificing future security.

Emergency Savings

Building a dedicated cash reserve is the most resilient way to handle surprise expenses. Even starting small helps you avoid taxable, penalized distributions or high-interest debt when life happens.

Family and Friends

If other financing options aren’t available, a clear, written repayment plan with a trusted relative or friend may be preferable to shrinking retirement assets—especially if you’re years away from retirement.