Can You Use Your IRA for Hardship?

by Leslie McClintock

The individual retirement arrangement, or IRA, first came to legislative fruition with the passage of ERISA, the Employment Retirement Income Security Act, in 1974. As the name of the Act suggests, Congress's intent when formulating the IRA was to encourage workers to save specifically for retirement, However, Congress anticipated that unless there were provisions allowing workers to access their savings in the event of a hardship, they would be reluctant to contribute to IRAs, defeating the purpose of creating the accounts. While the IRS does not technically refer to these distributions as "hardship distributions," the effect is very similar to hardship distributions from a qualified workplace plan.

General Rule for Distributions

In most cases, distributions from individual retirement arrangements prior to the age of 59 1/2 incur a 10 percent penalty, in addition to any federal income taxes or state taxes due. The same is generally true of Roth IRAs as well, though there is no income tax due on Roth IRAs provided the money has remained within the IRA for at least five years.

Hardship Provisions

The IRS allows an exception to the 10 percent penalty for those under age 59 1/2 in the event of death, disability, or to pay medical expenses, including medical insurance and COBRA premiums, to the extent they exceed 7.5 percent of your adjusted gross income. The IRS also allows you to tap your IRA to fund college expenses for yourself or a family member.

Other Situations

If you are under threat of losing your home to an eviction or foreclosure, you can access your IRA penalty free to avoid it. You can also use your IRA to fund a down payment to purchase, rebuild or build a first home for yourself or a family member, up to a $10,000 limit. Members of the reserve components of the armed forces also qualify for penalty free withdrawals, if called to active duty, in order to ensure that their family does not lose income as a result of the active duty tour or deployment.

Section 72(t)

You can also avoid the 10 percent penalty if you commit to taking the money out of your IRA in "substantially equal periodic payments" over the rest of your life, or over the combined life expectancies of yourself and a designated beneficiary--most often a spouse, but not always. This process, also called "annuitization," results in a steady annual or monthly payment, and an account balance designed to reach zero at the end of your life expectancy or life expectancies. You can retain the risk of outliving your income by keeping the IRA in stocks, cash and bonds, or you can invest your IRA in a lifetime income annuity, essentially paying an insurance company to take on the risk that you will outlive your income. The lifetime income annuity issuer will pay you a guaranteed income for as long as you or your beneficiary live.