Options for IRA Hardship Withdrawals

There are times that stretch the resources of even the most financially savvy people. While no one wants to dig into their retirement savings early, or take a 10 percent penalty, sometimes it's the best way to stay out of financial trouble. Fortunately, there are a number of ways you can access your IRA funds without paying an early-withdrawal penalty.

IRS-Defined Hardships

You can take a penalty-free withdrawal from an IRA before age 59 1/2 for certain medical, educational and housing related expenses. You can use your IRA funds if you become permanently disabled, or to cover medical expenses greater than 7.5 percent of your income. You can also use IRA funds to cover some medical-insurance payments and certain higher-education expenses. You may also tap IRA funds to buy a home for the first time or to renovate your existing house.

Annuity Payments

Even if you do not qualify for a penalty waiver due to an IRS-defined hardship, you can still avoid the early withdrawal penalty if you take annuity payments for at least five years. Annuity payments are like taking the traditional IRA required minimum distribution: each year, you must withdraw a value equal to your Dec. 31 account balance times your life-expectancy factor from the tables in IRS Publication 590.

Roth Five-Year Rule

Roth IRA accounts must jump an additional hurdle to get the penalty waiver: your account and conversions must be at least five years old. In IRS terms, "five years" for all contributions is over once you reach the fourth Jan. 1 following your initial contribution. Each conversion has its own clock -- you cannot touch that money without a penalty until it has fulfilled the five-year countdown.

Current Contributions and Rollovers

If your hardship is very short term or unexpected, it's worth noting that you can remove your current-year contribution -- and any earnings -- from the account with no penalty whatsoever if you do it by Dec. 31 of the same year. In addition, if you can redeposit the value of your withdrawal into your account or another IRA account within 90 days, it counts as a rollover and there is no tax consequence.