This article reflects federal rules and general state rules as of June 2026 and covers tax years 2025 and 2026. Tax law changes — confirm current figures before you file.
Quick Answer
Yes. You can pull money from a traditional IRA before age 59½ without the 10% early-withdrawal penalty for medical care — but only the part of your unreimbursed medical bills above 7.5% of your adjusted gross income (AGI) for tax year 2025. Health insurance premiums while unemployed, disability, and terminal illness also qualify.
What This Really Means for You
Reaching into a retirement account to cover a hospital bill or keep your family insured is rarely a happy choice. The good news is the IRS does not punish every early withdrawal the same way. Under Internal Revenue Code section 72(t), several medical-related exceptions let you skip the extra 10% penalty that normally hits money taken out before age 59½. The catch is that “penalty-free” does not mean “tax-free,” and each exception has its own narrow rules.
That distinction can cost or save you thousands. If you take $20,000 from your IRA at age 50 and none of it qualifies for an exception, you owe a $2,000 penalty on top of regular income tax. Roughly 51 million U.S. households owned an IRA in mid-2024, according to the Investment Company Institute, so this is a decision millions face — often during a health crisis when one wrong move adds an avoidable tax bill. This guide shows you exactly which medical situations qualify, how to do the math, and how to claim the exception correctly.
- 🩺 How to calculate the exact penalty-free amount using the 7.5%-of-AGI medical threshold.
- 💼 When health insurance premiums paid while unemployed escape the 10% penalty.
- ♿ How the disability and terminal-illness exceptions work — and what proof you need.
- 📄 The forms (1099-R and Form 5329) and the codes that make or break your claim.
- 🚫 The seven costly mistakes that turn a “penalty-free” withdrawal into a surprise tax bill.
First, Separate “Penalty” From “Tax”
A traditional IRA withdrawal before age 59½ can trigger two different costs, and people confuse them constantly. Understanding the split is the foundation for everything below.
The first cost is ordinary income tax. Money in a traditional IRA was never taxed going in, so it is taxed coming out — at your regular income tax rate — no matter your age and no matter the reason. A medical exception never erases this.
The second cost is the 10% additional tax, commonly called the early-withdrawal penalty. Per the IRS, this 10% applies on top of income tax when you withdraw before age 59½, unless an exception applies. The medical exceptions in this article remove only this 10% piece.
The consequence of mixing these up is real. A reader who believes a “penalty-free” medical withdrawal is also tax-free can under-withhold and face a balance due — plus possible underpayment interest — at filing time. The fix: always plan for income tax on the full taxable distribution, then layer the exception on top to drop the 10%.
The Three Core Medical Exceptions (Plus Two Newer Ones)
The tax code does not have one “medical” exception — it has several. Each lives in its own subsection of section 72(t), and each answers a different real-life situation.
Exception 1: Unreimbursed Medical Expenses Over 7.5% of AGI
This is the classic medical exception, found in section 72(t)(2)(B). It lets you avoid the 10% penalty on the portion of your IRA withdrawal that equals your unreimbursed medical expenses above 7.5% of your AGI.
Here is what it means in plain terms. Add up the medical bills you paid out of pocket during the year that were not reimbursed by insurance. Subtract 7.5% of your AGI. Whatever is left is the maximum amount of your IRA withdrawal that escapes the penalty.
The consequence of the floor is that small bills get no relief. If your AGI is $60,000, the first $4,500 of medical expense (7.5% of $60,000) buys you nothing — only dollars above that count.
A common misconception is that you must use the IRA money to pay the bills, or that you must itemize deductions. Neither is true. The expense only has to be paid in the same year as the withdrawal, and you can claim this exception even if you take the standard deduction. The medical costs must qualify under section 213(d) — the same list used for the medical deduction (doctors, hospitals, prescriptions, dental, and more).
What to do about it: tally your qualifying expenses, run the 7.5% math, and report the penalty-free amount on Form 5329 using exception code 05.
Exception 2: Health Insurance Premiums While Unemployed
A separate exception under section 72(t)(2)(D) covers health insurance premiums paid while you are out of work. This one is unique to IRAs — it does not apply to 401(k) plans.
To qualify, you must have received unemployment compensation for 12 consecutive weeks because you lost your job, and you must take the IRA withdrawal in the year you received that unemployment (or the following year). The penalty-free amount is capped at what you actually paid for medical insurance for yourself, your spouse, and your dependents.
The consequence of the timing rule is strict. If you wait too long — more than 60 days after returning to work, or into a second year — the exception can vanish. Self-employed people who would have qualified for unemployment but for being self-employed may still use this exception.
A frequent misconception is that any laid-off worker qualifies automatically. You must actually collect unemployment for 12 weeks first. What to do: keep your unemployment records and premium receipts, and claim the amount with Form 5329 code 07.
Exception 3: Total and Permanent Disability
Section 72(t)(2)(A)(iii) waives the penalty when the IRA owner is totally and permanently disabled. This covers far more than medical bills — the entire withdrawal can be penalty-free.
The IRS standard is demanding. You must be unable to do any substantial gainful activity because of a physical or mental condition that a doctor expects to be permanent or to last indefinitely (or result in death). A temporary injury does not count.
The consequence of a weak claim is a denied exception and a 10% penalty. You should keep a physician’s statement documenting the disability. What to do: report the distribution with Form 5329 exception code 03, and retain medical proof in case the IRS asks.
Exception 4: Terminal Illness (Newer)
The SECURE 2.0 Act added a terminal-illness exception. A person certified by a physician as having a condition reasonably expected to cause death within 84 months can take penalty-free distributions. This exception is primarily structured for employer plans, but it reflects the same medical-hardship logic and may be claimed where it applies.
Exception 5: Emergency Personal Expense (Newer)
Since 2024, section 72(t)(2)(I) allows one penalty-free withdrawal per calendar year for an unforeseeable personal or family emergency — including a medical emergency — up to the lesser of $1,000 or your vested balance over $1,000. It is small, but it requires no AGI math and no proof of insurance.
Which Situation Applies to You?
The right exception depends on your circumstances, not the keyword you searched. Use this quick branch to find your section.
- You have large out-of-pocket medical bills this year → Exception 1 (7.5%-of-AGI rule).
- You lost your job and are paying for health insurance → Exception 2 (unemployed premiums).
- You cannot work due to a lasting condition → Exception 3 (disability), which can cover the whole withdrawal.
- A doctor has certified a terminal diagnosis → Exception 4 (terminal illness).
- You need a small amount fast for an emergency → Exception 5 (up to $1,000 once a year).
- You are 59½ or older → No exception needed; the penalty no longer applies.
How the Math Works: A Fully Worked Example
The 7.5% medical exception is where readers most need real numbers. Here is the full calculation, step by step, so you can copy it.
Assume it is tax year 2025. Your AGI is $80,000. During the year you paid $18,000 in unreimbursed medical bills, and you took a $25,000 early withdrawal from your traditional IRA at age 52.
- Step 1 — Find the AGI floor: 7.5% × $80,000 = $6,000.
- Step 2 — Subtract the floor from your medical bills: $18,000 − $6,000 = $12,000.
- Step 3 — The penalty-free amount is the lesser of that result or your withdrawal: lesser of $12,000 and $25,000 = $12,000.
- Step 4 — The remaining $13,000 of the withdrawal ($25,000 − $12,000) still gets the 10% penalty: $13,000 × 10% = $1,300.
So instead of a $2,500 penalty on the full $25,000, you owe only $1,300. The exception saved you $1,200. Remember: the entire $25,000 is still subject to ordinary income tax — the exception only touched the penalty.
Three Common Scenarios and Their Outcomes
Below are the three situations readers most often face, with the tax result for each. Figures use tax year 2025.
Scenario A: Big Surgery Bill, Standard Deduction
| Your Situation | What Happens to the Penalty |
|---|---|
| AGI $70,000; paid $30,000 in unreimbursed surgery costs; withdrew $30,000 from IRA at age 55; takes the standard deduction | Penalty-free amount = $30,000 − (7.5% × $70,000 = $5,250) = $24,750. Only $5,250 faces the 10% penalty = $525. You do not need to itemize to use this. |
Scenario B: Laid Off, Paying Family Premiums
| Your Situation | What Happens to the Penalty |
|---|---|
| Collected unemployment 14 weeks; paid $9,600 in family health premiums; withdrew $9,600 from IRA the same year | Entire $9,600 is penalty-free under the unemployed-premium exception. Income tax still applies. Claim with Form 5329 code 07. |
Scenario C: Withdrawal With No Qualifying Exception
| Your Situation | What Happens to the Penalty |
|---|---|
| AGI $90,000; paid only $3,000 in medical bills; withdrew $15,000 from IRA at age 48 | The $3,000 is below the $6,750 floor (7.5% × $90,000), so no medical exception applies. Full $15,000 faces the 10% penalty = $1,500, plus income tax. |
Real-World Examples
Numbers are clearer with names attached. Here are three people working through the rules.
Maria, age 53 — self-employed, $40,000 surgery. Maria has an AGI of $100,000 and paid $40,000 out of pocket for surgery in 2025. Her floor is $7,500 (7.5% × $100,000). She withdraws $40,000 from her traditional IRA. Her penalty-free amount is $40,000 − $7,500 = $32,500. Only $7,500 is penalized at 10% ($750), and she reports the exception on Form 5329 with code 05.
James, age 49 — laid off, paying COBRA. James lost his job and collected unemployment for 16 weeks. He paid $11,000 in COBRA premiums to keep his family covered and withdrew $11,000 from his IRA the same year. All $11,000 escapes the 10% penalty under section 72(t)(2)(D). He keeps his unemployment determination letter and premium statements.
Diane, age 57 — permanently disabled. A stroke left Diane unable to work, and her doctor certified the condition as permanent. She withdraws $20,000 from her IRA to live on. The entire $20,000 is penalty-free under the disability exception, reported with Form 5329 code 03. She still owes income tax, so she has 20% withheld to avoid a surprise.
Roth IRAs Work Differently
The penalty rules above apply most cleanly to traditional IRAs. Roth IRAs follow special ordering rules that often make the medical exception unnecessary.
With a Roth IRA, your own contributions come out first, and they are always tax-free and penalty-free because you already paid tax on them. Only after you have withdrawn all contributions do you reach earnings, which can face tax and the 10% penalty if you are under 59½ and the account is less than five years old.
The practical result: many Roth owners can cover a medical bill from contributions alone and never need a 72(t) exception. If you must dip into earnings, the same medical exceptions then apply to remove the penalty — but the earnings may still be taxable. Per IRS guidance, certain Roth distributions are not taxable at all.
Traditional vs. Roth IRA: Medical Withdrawal Compared
| Traditional IRA | Roth IRA |
|---|---|
| Full withdrawal is income-taxable; medical exception removes only the 10% penalty | Contributions come out tax- and penalty-free first; medical exception applies only once you reach taxable earnings |
| Best when you have no other cash and a qualifying medical situation | Often no exception needed — contributions cover the bill |
| Report exception on Form 5329 | Report on Form 8606 and Form 5329 if earnings are tapped |
The Forms: How to Actually Claim the Exception
Claiming the exception is a paperwork step, and skipping it is a common, costly error. Two forms matter.
Your IRA custodian sends you a Form 1099-R reporting the distribution. Box 7 holds a distribution code. Custodians often enter code 1 (“early distribution, no known exception”) even when an exception applies, because they do not track your medical bills.
That is where Form 5329, “Additional Taxes on Qualified Plans (Including IRAs),” comes in. You attach it to your Form 1040 and enter the correct exception code to override the 1099-R. Use code 03 for disability, 05 for unreimbursed medical expenses, and 07 for unemployed health insurance premiums.
The consequence of not filing Form 5329 is that the IRS assumes the full distribution is penalized and may bill you 10% plus interest. The deadline matches your tax return — generally April 15, 2026, for a 2025 distribution, or October 15, 2026, with an extension.
State Rules: Does Your State Add Its Own Penalty?
Federal law is only half the picture. States handle early IRA withdrawals differently, and a few add their own penalty on top of the federal 10%.
Most states with an income tax simply tax the distribution as ordinary income and follow the federal exceptions. But California imposes an additional 2.5% state penalty on early distributions, reported on FTB Form 3805P, which generally mirrors the federal exceptions — so a federally penalty-free medical withdrawal is usually free of the state penalty too.
Nine states have no broad income tax at all — including Texas, Florida, and Washington — so there is no state tax or penalty on the withdrawal in those places. The lesson: confirm your own state’s rule before you assume the federal answer is the whole answer. Never use a federal figure as a stand-in for a state one.
Mistakes to Avoid
Each error below has a concrete cost. Read these before you touch the money.
- Assuming “penalty-free” means “tax-free.” Outcome: you under-withhold and owe income tax plus possible underpayment interest at filing.
- Skipping Form 5329. Outcome: the IRS applies the 10% penalty by default and may add interest.
- Ignoring the 7.5%-of-AGI floor. Outcome: you over-claim the exception and face an IRS adjustment.
- Paying the medical bill in a different year than the withdrawal. Outcome: the expense no longer counts for the exception, and the penalty applies.
- Claiming the unemployed-premium exception without 12 weeks of benefits. Outcome: a denied exception and a 10% penalty.
- Using a 401(k) for the unemployed-premium or first-home exception. Outcome: those IRA-only exceptions do not apply, so the penalty hits.
- Forgetting your state’s separate penalty. Outcome: an unexpected state tax bill, such as California’s extra 2.5%.
Do’s and Don’ts
A few simple habits protect your withdrawal.
- Do run the 7.5% math before you withdraw, so you take only the penalty-free amount — it minimizes both tax and penalty.
- Do keep receipts, 1099-R, and proof of medical bills, because the IRS can ask years later.
- Do consider withholding income tax from the distribution, so you are not blindsided in April.
- Do check whether Roth contributions could cover the bill first, since they avoid tax and penalty entirely.
- Do confirm your state’s treatment, because state penalties and conformity vary.
- Don’t rely on your custodian’s Box 7 code, since it often shows no exception.
- Don’t withdraw more than your qualifying medical amount, or the extra gets penalized.
- Don’t assume disability is automatic — it requires a permanent, total condition with proof.
- Don’t miss the filing deadline for Form 5329, or you may lose easy correction.
- Don’t treat the emergency-expense rule as unlimited; it is capped and once per year.
Pros and Cons of Tapping an IRA for Medical Care
Weigh both sides before deciding.
- Pro: You can access cash fast during a health crisis without a loan or credit-card interest.
- Pro: Qualifying medical situations remove the 10% penalty, lowering the cost.
- Pro: The 7.5% exception works even if you take the standard deduction.
- Pro: Disability and terminal-illness exceptions can cover the entire withdrawal.
- Pro: Roth contributions can often be used with no tax and no penalty at all.
- Con: You still owe ordinary income tax on traditional IRA money, which can be steep.
- Con: You permanently lose the future tax-advantaged growth of those dollars.
- Con: A larger taxable income can raise your tax bracket and affect credits.
- Con: Missing a rule (timing, the floor, the form) can erase the exception.
- Con: Some states add their own penalty, increasing the true cost.
What to Do Next
If you are about to make this move, take these steps in order.
- Estimate your AGI for the year and multiply by 7.5% to find your medical floor.
- Total your unreimbursed, qualifying medical expenses paid this year.
- Check whether the unemployed-premium, disability, or terminal-illness exception fits you better.
- Consider pulling from Roth contributions first if you have a Roth IRA.
- Withdraw only the amount you need, and have income tax withheld.
- Gather your 1099-R, premium statements, and medical receipts.
- File Form 5329 with your Form 1040 by the deadline, using the correct exception code.
- Confirm your state’s treatment and file any state form, such as California’s FTB 3805P.
This article is educational and not a substitute for advice from a licensed professional for your situation. If your case involves disability proof, a 72(t) substantially-equal-payment plan, large dollar amounts, or a multi-state move, talk to a CPA or tax attorney first — that review typically costs a few hundred dollars and can prevent a far larger mistake.
FAQs
Can I withdraw from my IRA penalty-free for medical bills?
Yes. For tax year 2025, you avoid the 10% penalty on the part of your withdrawal equal to unreimbursed medical expenses above 7.5% of your AGI. Income tax still applies to the full traditional IRA amount.
Does the medical exception make my withdrawal tax-free?
No. It removes only the 10% early-withdrawal penalty. Traditional IRA distributions remain subject to ordinary income tax regardless of the exception.
Do I have to itemize to use the 7.5% medical exception?
No. You can claim the penalty exception even if you take the standard deduction. You only need the qualifying expenses paid in the same year as the withdrawal.
What is the 7.5% AGI threshold for 2025?
7.5% of your adjusted gross income. Only unreimbursed medical expenses above that floor count toward the penalty-free amount.
Can I avoid the penalty for health insurance premiums?
Yes, if you collected unemployment for 12 consecutive weeks and paid the premiums in that year or the next. This exception applies to IRAs only, not 401(k)s.
Which form do I file to claim the exception?
Form 5329. Attach it to your Form 1040 and enter the exception code — 03 for disability, 05 for medical expenses, 07 for unemployed premiums.
What exception code is used for medical expenses?
Code 05. Enter it on Form 5329 for unreimbursed medical expenses over 7.5% of AGI.
Does disability let me withdraw my whole IRA penalty-free?
Yes. A total and permanent disability removes the 10% penalty on the entire distribution, though income tax still applies. Keep a physician’s certification.
Do Roth IRA withdrawals for medical care get penalized?
No, not on your contributions, which always come out tax- and penalty-free first. Only earnings withdrawn early can face tax and penalty, where the medical exception then helps.
Does my state charge an extra early-withdrawal penalty?
It depends. Most states follow federal rules, but California adds a 2.5% penalty on FTB Form 3805P. No-income-tax states like Texas and Florida charge nothing.
Is there a deadline to claim the exception?
Yes — your tax filing deadline. For a 2025 distribution, that is generally April 15, 2026, or October 15, 2026, with an extension, when you file Form 5329.
Can I use the emergency-expense exception for a medical bill?
Yes. Since 2024 you may take one penalty-free emergency withdrawal per year, up to the lesser of $1,000 or your vested balance over $1,000, with no AGI math required.