What Can You Use an IRA Account for Without Getting Penalized?

by Jane Meggitt

Individual Retirement Accounts are designed as retirement savings, not funds to use for other purposes. The Internal Revenue Service generally charges a 10 percent tax on early withdrawals -- those made before the account holder reaches the minimum withdrawal age of 59 1/2. However, there are certain situations in which you can make early withdrawals from an IRA without being penalized.

Education Expenses

Distributions from the IRA are free of tax before the minimum age if used to pay qualified educational expenses for the account holder, spouse, child or step-child. The IRS identifies qualified educational expenses as tuition, book, fees, supplies or equipment necessary for enrollment in an eligible institution of higher learning. Room and board qualifies if the student is enrolled at least half-time. Eligible institutions are colleges,universities, vocational or technical schools participating in a United States Department of Education student aid program.

Buying a Home

Individuals buying or building a first home may withdraw funds from their IRAs without penalty. In addition to actual costs of buying or building a dwelling, the IRA funds may be used to pay for financing, settlement and closing costs. First-time homebuyers are those with no previous ownership of a primary residence. The spouse must also meet this requirement. Should the IRA owner receive a distribution and construction or purchase is delayed, he can contribute the distribution amount to an IRA within 120 days. Such contributions are considered IRA rollovers.

Medical Expenses

IRA funds may be withdrawn without penalty for individuals with unreimbursed medical expenses totaling more than 7.5 percent of their adjusted gross income for the year. The distributions from the IRA cannot cost more than the person's medical insurance to qualify as penalty-free. People rendered legally disabled by illness or accident may also withdraw funds from their IRAs without the tax penalty, but must provide medical documentation from certified physicians or other healthcare professionals.

Hardship Situations

Other retirement plans, such as 401ks, allow penalty-free distributions in certain hardship situations. According to the IRS, "Certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions." Typical retirement plan hardship distribution situations include "unforeseeable emergencies" resulting in severe financial hardship. This may result from an accident, illness, property loss due to disaster, and other events beyond the individual's control. However, before withdrawing money from the IRA, check with a tax adviser to see if your particular emergency qualifies as a hardship.

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