IRA Withdrawal Rules: Penalty-Free Withdrawal From Traditional and Roth IRAs

Traditional IRAs can give you a tax break and grow tax-deferred. Roth IRAs are funded by after-tax money and grow tax-free. Along with your 401(k), IRAs will likely constitute the bulk of your retirement savings. But IRAs can also be used for non-retirement purposes. If you’re buying your first home or paying for college, you can take a distribution from your IRAs without the usual 10% early withdrawal penalty.


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Using IRA to Buy Your First Home

You can withdraw up to $10,000 from your IRA for the purchase of a first home. If you’re married, you can each take $10,000 out of your individual accounts for a total of $20,000. And this rule is very flexible:

  • First home can be “first” for either you or your spouse.
  • The purchase also qualifies if you haven’t own a home at any time during the previous two years.
  • In fact, the rule even extends to your children, grandchildren, and parents.

Using IRA to Pay For School

When it comes to school costs, no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandchildren. This means the withdrawal must be used for tuition and school fees. Moreover, the school has to be IRS approved institution — this is any college, university, vocational school or other post-secondary facility that meets federal student aid program requirements.

Roth IRA Early Withdrawal

Since Roth IRAs are taxed differently than traditional IRAs, the rules for a qualified distribution are a little different. With a Roth IRA, you can always withdraw your original contribution completely tax-free as long as you have had the Roth for five years or more.

In the end, you should really try to avoid using your IRA savings for anything other than retirement, but it’s nice to know you have that money for certain life events if absolutely necessary.

About the Author

By , on May 18, 2010
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the owner and publisher of WorkSaveLive.com.

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Leave Your Comment (7 Comments)

  1. Pinyo says:

    @Tracy – yes, you can use 401k hardship withdrawal for higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you).

    Source: About.com

  2. Tracy says:

    Can paying for education apply to 401k as well, if yes is there any restriction such as other source must be used up or no income.

  3. Pinyo says:

    @Barbara – As far as I know, the answer is NO. However, you could withdraw your Roth IRA principal (the amount you contributed) tax and penalty-free — but this may not be the best use of your IRA savings.

    @Ron – In general, 5 years rule apply. However, because you are older than 59 1/2, I believe you could withdraw penalty free. The best bet is to give your CPA or tax advisor a quick call.

  4. Ron Kientz says:

    We converted two traditional IRA’s in February 2010. Question: We turn 70 1/2 in September 2011. Do we have to wait Five years for ANY withdrawals OR Five years for any withdrawals on the EARNINGS only on the account OR can we withdraw any amount anytime after we are 70 1/2. Thanks, Ron Kientz

  5. Barbara Kraxberger says:

    Does paying off a school loan with your money from your IRA constitute the no tax or penalty option? I understand the IRS tax 10% but what is the other penalty payments and to whom do you pay that to?

  6. Andy says:

    But don’t forget – you still need to pay taxes on the withdrawal!

  7. Bernz says:

    This is exactly what a lot of parents have asked me whether they can use their IRA’s to finance their child’s education and not incur a penalty upon withdrawal.

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