Most Early IRA Withdrawals Get Hit With a Fee -- But 3 Exceptions Could Save You

Key Points

• Early withdrawals from a traditional IRA will result in a 10% penalty and taxes owed on the withdrawn amount.

• You can withdraw contributions, but not earnings, from a Roth IRA at any time without facing penalties.

• Deciding between a traditional and Roth IRA generally comes down to when you want to pay taxes.

• The $23,760 Social Security bonus most retirees completely overlook ›

When it comes to saving and investing for retirement, there aren't many better routes than utilizing retirement accounts. The most popular option is a 401(k), but it's not the only viable option. IRAs are also great options to consider. There are several different types of IRAs, but the two most common options are the traditional IRA and the Roth IRA. The difference between these accounts comes down to when you get your tax break and pay taxes.

With a traditional IRA, you get your tax break upfront. Depending on your income, filing status, and whether you're covered by a retirement plan at work or not, you can deduct all or most of your contributions from your taxable income. With a Roth IRA (which has income limits for contribution eligibility), you get your tax break on the back end. You contribute after-tax dollars, and in return, you're allowed to take tax-free withdrawals in retirement.

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Early withdrawals from a traditional IRA work similarly to those from a 401(k): Doing so will result in a 10% early withdrawal fee, and you'll owe taxes on the amount withdrawn. In a Roth IRA, you can withdraw contributions, but not earnings, at any time without a penalty fee.

Although you shouldn't contribute to a retirement account with the intention of withdrawing the money early, it does help to know there are situations where you can do so without facing the typical 10% early withdrawal penalty and subsequent taxes, depending on the account. Let's go through a few that only apply to IRAs.

1. Buying your first home

Buying your first home is a huge life milestone for most people. In most cases, the down payment is the one thing that holds people back from purchasing a home. Luckily, IRAs allow you to use up to $10,000 from your account(s) to put toward this purchase.

To qualify, the purchase must be made by you, your spouse, child, or grandchild. If you're buying the home alongside them, both of you can withdraw $10,000 to put toward the purchase.

This could be a great way to put money into an IRA, let it (ideally) grow, and then use it toward the home purchase. Aside from the down payment, this money can also go toward closing costs, settlement fees, or other related expenses.

Note: The $10,000 is a lifetime limit, not a limit per home purchase.

2. Higher education expenses

If you've recently been in college or know someone who is approaching, attending, or has recently graduated from college, I'm sure I don't need to tell you how expensive higher education has become over the years. You can make withdrawals from an IRA to help cover some of these costs.

The money can only be used for qualified higher education expenses, meaning it can go toward costs like tuition, student fees, books, and room and board (if you're enrolled at least half-time), but not toward expenses like transportation, insurance, or optional equipment.

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3. Health insurance premiums

Life happens, and sometimes, people find themselves unemployed. Oftentimes, through no fault of their own. When this happens, it shouldn't mean losing access to affordable health insurance.

If you're unemployed, you can use money from your IRA to cover your health insurance premiums. To qualify, you must have received unemployment compensation for at least 12 consecutive weeks and made the IRA withdrawal in the same or following year before you're reemployed. You must also take the distribution within 60 days after you're reemployed.

All three criteria must be met in order to qualify.

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