What qualifies for a hardship withdrawal from an IRA?

When you contribute to an IRA, these contributions are meant for your retirement. However, in as much as you would like the retirement savings to remain untouched, you may be forced to tap into your IRA to pay off some unexpected expenses. Unfortunately, making a withdrawal before attaining age 59 ½ can trigger a 10% penalty, but certain expenses may qualify for a hardship withdrawal from an IRA.

You can take an IRA hardship withdrawal to cover unreimbursed medical expenses that exceed 10% of your AGI, qualified higher education expenses, and health insurance premiums. You can also take a hardship withdrawal if you have become permanently disabled, fulfill an IRS levy, or purchase your first home. If your expense qualifies for a hardship withdrawal, you will be exempted from the 10% penalty for early withdrawals.

IRA Hardship Withdrawals

The IRS allows retirement savers to take tax-free distributions from their IRA when they reach age 59 ½. However, if you are younger than 59 ½, you will owe a 10% early withdrawal penalty. You will also owe income taxes on the distribution if you are withdrawing from a traditional IRA.

However, the IRS may waive the 10% penalty for certain qualified expenses. Generally, you can take a hardship withdrawal to cover certain expenses such as medical expenses, qualified higher education expenses, and or settle unpaid taxes. The IRS limits the amount you can withdraw to just the amount you need to cover the specific expense.

What Qualifies for a Hardship Withdrawal from an IRA

If you take a distribution from your IRA before age 59 ½, you will pay a 10% penalty for early distribution. However, certain expenses may qualify for a hardship withdrawal:

Here are some of the expenses that qualify for a hardship withdrawal:

College expenses

The cost of college has increased over the years, and you can tap into your IRA to raise the funds needed to pay for college. You can take a penalty-free IRA withdrawal to cater for college expenses for yourself, spouse, or children.

Some of the college expenses that qualify include tuition, books, supplies, room and board, and equipment required for enrollment. The student benefiting from these funds must be enrolled in a college at least half-time.

You must use the amount withdrawn to pay the qualified education expenses in the same year you took a distribution from your IRA. The government considers the IRA withdrawal as part of the student’s income, and it can affect the student’s eligibility for student aid.

Unreimbursed medical expenses

If you have racked up medical bills that are not covered by your health insurance, you may be allowed to take a hardship distribution to clear these expenses.

The IRS allows retirement savers to take a penalty-free distribution to pay unreimbursed medical expenses that exceed 10% of the adjusted gross income. The withdrawal can be used to cover annual checkups, dental and vision treatments, prescriptions, and surgeries.

You must take the hardship withdrawal in the same year that you racked up the medical bill. You can include the medical bill in your annual tax return, but you don’t have to itemize deductions to get the penalty waiver.

First-time homebuyers

If you are a first-time homebuyer, meaning you have not owned a home in the previous two years, you qualify to take a penalty-free hardship withdrawal from your IRA. The IRS limits the hardship withdrawal to $10,000 for your lifetime.

You can make a withdrawal in several batches, but the total withdrawals cannot exceed $10,000. If you withdraw more than $10,000, the excess withdrawal will be subject to the 10% penalty if you are below 59 ½.

If you are married, and your spouse has his/her IRA, they can take another $10,000 penalty-free distribution, hence increasing the total withdrawal to $20,000.

Health insurance premiums while unemployed

If you lost your job, you can dig into your IRA penalty-free to pay health insurance for yourself, spouse, and other dependents.  However, to be eligible for a penalty-free withdrawal, you must be unemployed and have received unemployment compensation for the past 12 consecutive weeks.

Permanent disability

If you have become disabled, you can dip into your IRA without owing a 10% penalty. You will be required to provide proof of disability before you can be allowed to take a hardship distribution.

The IRS does not limit how the distributions can be used. You can use the money to meet any needs you have such as medical expenses, gas, paying for college, food and other supplies, etc.

Substantially equal periodic payments (SEPP)

If you want to take withdrawals from your IRA for several years, you may qualify to make penalty-free withdrawals. These distributions are known as substantially equal periodic payments, and they are equal distributions spread over a five-year period based on your life expectancy.

You must take the SEPP from your IRA in five consecutive years, or until you turn 59 ½, whichever lasts a longer time.  

Fulfill an IRS levy

The IRS is legally allowed to seize your retirement savings if you have unpaid taxes. If the IRS directly draws from your account, this amount will be exempted from the 10% penalty if you are below 59 ½. However, if you withdraw money from your IRA to pay the back taxes as a way of avoiding the levy, you won’t qualify for the penalty exemption.