4 Good Reasons to Use Your IRA Early

In most cases, withdrawing from your traditional IRA before you turn 59 and a half can mean massive taxes and penalties. With a Roth IRA, you are allowed to withdraw your original contributions at any time, but any investment returns are subject to early withdrawal penalties. However, there are some acceptable reasons to withdraw your money early and penalty-free. For example, did you know that you are allowed to withdraw up to $10,000 toward the purchase of your first home?

This and some of the other permitted early withdrawals can certainly make good financial sense over the long run. Here are four early IRA withdrawals in particular that can pay off tremendously.

$10,000 toward your first home

This withdrawal can be used for a first-time home purchase for you or your spouse, children, grandchildren, or parents. However, you have to pick just one. It's a $10,000 lifetime cap, and goes up to $20,000 for married couples, and you must use the funds within 120 days of withdrawal. So, if the purchase falls through or you decide not to buy, you need to put the funds back in your account.

Kellie Jo Helget

Withdrawing to buy your first house makes good financial sense for several reasons. First, you'll be able to stop paying rent. Instead, you'll start building equity in a tangible asset. Second, the power of leverage you get from financing a home can produce returns that could be as good as or better than anything you could hope to produce in your IRA.

Let's say you buy a $100,000 "starter home" and put $20,000 down. If the value of the home appreciates at just 3% per year, you're actually getting a 15% return on your initial investment, since you are only paying for one-fifth of the home's value up front.

Big medical expenses

If you use an IRA distribution to pay unreimbursed medical expenses that total more than 10% of your adjusted gross income, you won't have to pay any penalty.

Your health is your number one asset, and tapping into your IRA makes a lot more sense than going into tens of thousands of dollars in medical debt. Make sure you save all of your receipts in order to be able to qualify for the exemption, and to be able to document exactly where the money went.

Higher education

Qualified expenses not subject to the IRS's 10% early withdrawal penalty include tuition, fees, books, supplies, as well as room and board. Basically, any expenses incurred as a cost of attending an accredited, degree-granting post-secondary institution can be withdrawn.

And, unlike the first-time home buyer's exemption, this is not a limited or a one-and-done deal. You can pay all of the qualifying expenses you want to for yourself or your spouse, children, or grandchildren.

flickr/ 401(k) 2012

Obviously, paying for college can produce a great return on investment. According to a study by Georgetown University, the average college graduate can expect to earn $2.3 million over his or her lifetime, or about $1 million more than workers with just a high school diploma. The long-term financial benefits can definitely make a short-term hit to your IRA worthwhile.

Health insurance

If you are unemployed and collect unemployment compensation for 12 weeks or more, you're eligible to use funds from your IRA to pay for medical insurance for yourself, your spouse, and your dependents. You can use this exemption in the year you become unemployed, as well as the following year, until 60 days after you become reemployed.

As mentioned earlier, your health is your number one "asset." While paying for health insurance can indeed be costly and can produce a substantial hit to your IRA savings, it's nothing in comparison to the financial nightmare you could experience if something should happen when you don't have health insurance.

Beware the tax man....

Remember that penalty-free doesn't mean tax-free. Even though you won't be on the hook for the 10% penalty, any of these qualified withdrawals will still be taxed as ordinary income if they arrived in your IRA on a tax-deferred basis.

So, before you decide to take out $20,000 to pay your child's tuition, be aware that you can expect an additional $5,000 in federal tax liability if you're in the 25% tax bracket.

That's not to say you shouldn't use any of these early withdrawal exemptions. With a little planning, using these early withdrawal exemptions can be very good for your long-term financial health.

Take advantage of this little-known tax "loophole" for retirement

Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report " The IRS Is Daring You to Make This Investment Now! ," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

The article 4 Good Reasons to Use Your IRA Early originally appeared on

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More