3 ways to withdraw from your IRA before retirement -- penalty-free

Matthew Frankel, Sean Williams, and Brian Stoffel, The Motley Fool10:02 a.m. EDT November 4, 2016

If you're not even close to retirement age, you may still be able to use your retirement savings.

(Photo: Getty Images)

Under normal circumstances, IRAs and most other retirement accounts cannot be used before age 59 1/2 without facing a penalty from the IRS. However, there are some big exceptions to the rule, and here we have three Fools discussing ways you could potentially use your IRA early without paying a penalty.

Tap your Roth IRA

Brian Stoffel: The key difference between a Roth IRA and a Traditional IRA is when the money you put in is taxed.

Type

Contributions    /    Growth     /  Distributions

TRADITIONAL IRA	NOT TAXED (DEFERRED)	NOT TAXED (DEFERRED)	TAXED
Roth IRA	Taxed	Not Taxed	Not Taxed

Data source: IRS.

Because the money you put into your Roth has already been subject to income tax, the IRS allows you to pull out any money that you put in, absolutely tax-free. There are, however, a couple of key caveats you need to be aware of.

1. Only the principal can be taken out without penalty. If you've put in $100,000 but your account has grown to $500,000, only that original $100,000 can be taken out without a penalty.
2. By choosing to withdraw this money, you are forfeiting any future growth — and, crucially — the tax advantages of any future growth.

That being said, withdrawing your Roth IRA principal is a simple and straightforward way to access your nest egg early, and penalty-free. While I would urge you to consider other options before doing this, it's nice to know that the lifeline exists.

Unreimbursed medical expenses

Matt Frankel: While there are some potentially good reasons for using your IRA early, such as the first-time homebuyer and college expense exceptions, a not-so-positive reason is for certain medical expenses.

Specifically, you can use IRA funds before retirement age penalty-free to pay certain unreimbursed medical expenses, but only those in excess of 10% of your adjusted gross income, or AGI. In other words, if your AGI for 2015 was $80,000, 10% of this amount would be $8,000. If you had $10,000 in unreimbursed medical expenses, you could withdraw $2,000 from your IRA penalty-free. You'd also qualify for a tax deduction, if you itemize on your 1040.

Also in the medical-expense realm, you can use IRA funds to pay health insurance premiums while you're unemployed, which my colleague Sean will get into shortly.

While it's not ideal to have to dip into retirement savings for medical expenses, it's certainly a good thing to have the option if you find yourself in a tough spot financially.

Health insurance premiums when unemployed 

Sean Williams: Taking money out of an IRA before hitting age 59 1/2 can lead to an unwanted penalty and ordinary income taxes on top of it. However, pulling money out of an IRA for the express purpose of paying for your health insurance during a period of unemployment is one of the very few exceptions that'll allow you to avoid paying this penalty.

It'd be nice if the IRS simply took you at your word and allowed you to pull money out of an IRA to pay your health insurance premiums, but a few things need to happen for you to qualify. According to the IRS, you need to have:

• Lost your job.
• Received unemployment compensation for at least 12 consecutive weeks.
• Received the distribution during the same year you received unemployment compensation or the following year.
• Received the IRA distribution no later than 60 days after you find new employment.

If you meet these qualifications, then you'll be able to access your IRA funds penalty-free.

Of course, keep in mind that there's a push-pull to this scenario. On one hand, pulling money out of your IRA means reducing the compounding capability of that money over time. Pulling out "X" amount of money to pay for your health insurance probably means giving up many multiples of X in the future. On the other hand, staying in good health is important, since it often means catching potentially serious diseases early before they become costly later in life.

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