Can You Use IRA Funds for Medical Expenses Penalty-Free?

An IRA withdrawal for medical expenses can escape the 10% early withdrawal penalty, but only for the portion of unreimbursed medical costs that exceeds 7.5% of your adjusted gross income (AGI) for the same tax year. Everything up to that 7.5% floor stays subject to the penalty if you’re under 59½, and the entire distribution still counts as taxable income regardless of why you took it.¹

How the 7.5% AGI Rule Works

Normally, pulling money out of a traditional IRA before age 59½ triggers a 10% additional tax on top of the ordinary income tax you already owe on the distribution.¹ The medical expense exception removes that extra 10% on a specific slice of the withdrawal: the amount matching your unreimbursed medical expenses above the 7.5% AGI floor.²

Two points cause the most confusion. The exception does not make the money tax-free. Every dollar out of a traditional IRA is still ordinary income. And you do not have to itemize to use it. The statute measures the medical amount “without regard to whether the employee itemizes deductions for such taxable year,” so someone taking the standard deduction can still claim the penalty exception on qualifying medical costs.²

The expenses and the withdrawal have to fall in the same tax year, but you don’t need to trace the dollars. If you paid $15,000 in qualifying medical bills in June and took $8,000 from your IRA in November of that same year, the timing works. Pay the bills in December and withdraw in January, and it doesn’t.

Doing the Math on Your Penalty-Free Amount

You need two numbers: your total unreimbursed qualified medical expenses for the year and your AGI.

Multiply your AGI by 0.075 to find the floor. At $80,000 of AGI, the floor is $6,000.
Subtract that floor from your qualifying medical expenses. If you paid $10,000, the penalty-free amount is $4,000.
Any IRA withdrawal up to that $4,000 avoids the 10% penalty. Anything beyond it gets hit with the full penalty plus regular income tax.

Higher incomes shrink the window. Someone earning $200,000 needs more than $15,000 in medical costs before a single dollar qualifies. The exception works best when medical bills are large relative to income.

What Counts as a Qualifying Medical Expense

The IRS uses the same definition it uses for the Schedule A deduction. Costs must be for diagnosing, treating, or preventing a physical or mental condition, or for care that affects a structure or function of the body.³ That covers payments to doctors, dentists, surgeons, and other licensed practitioners; prescription drugs and insulin; hospital and lab bills; prescribed medical equipment such as hearing aids, wheelchairs, and crutches; and long-term care insurance premiums up to an age-based annual cap.

What doesn’t count: cosmetic surgery done purely to improve appearance, gym memberships absent a specific doctor-prescribed program for a diagnosed condition, non-prescription vitamins and supplements, and funeral costs.³

Only unreimbursed amounts count. If insurance pays part of a bill, subtract that reimbursement before you run the 7.5% calculation.³ If a reimbursement comes in the following year for expenses that already justified a penalty-free withdrawal, you may have to pick that reimbursement up as income on the later return.

Keep itemized bills, explanation-of-benefits statements, pharmacy receipts, and proof of payment. In an audit, the burden sits with you to show each expense was for medical care rather than cosmetic or general wellness spending.

A Separate Exception for Health Insurance After Job Loss

The tax code offers a second, independent exception that often gets missed. If you lose your job, you can use IRA funds to pay health insurance premiums without the 10% penalty, and this one has no AGI floor.²

Three conditions apply:

You received unemployment compensation for at least 12 consecutive weeks.
The withdrawal happens in the year you received that unemployment compensation or the following year.
The penalty-free portion is capped at what you actually paid for health insurance for yourself, your spouse, and your dependents.

Self-employed people who would have qualified for unemployment benefits but for being self-employed can use the exception too.² Once you’ve been back at work for 60 days or more, the exception no longer covers new withdrawals.

Roth IRA Owners Usually Don’t Need This Exception

Roth IRA distributions come out in a set order: your contributions first, then conversion amounts, then earnings.⁴ Because contributions were made with after-tax dollars, you can withdraw up to the total of your contributions at any age, free of both tax and penalty, without invoking any exception at all.

If you’ve put $40,000 into a Roth that has grown to $55,000, that first $40,000 is simply your own money coming back. The medical expense exception only matters for a Roth owner once a withdrawal cuts into the earnings portion before 59½. At that point the exception can waive the 10% penalty on the qualifying slice, though the earnings themselves can still be taxable unless the distribution otherwise qualifies.⁴

Claiming the Exception on Your Tax Return

Your IRA custodian sends you Form 1099-R showing the gross distribution. Box 7 almost always carries code 1, meaning early distribution with no known exception, because the custodian doesn’t know why you withdrew the money.⁵ Claiming the exception is on you.

You claim it on Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” attached to your Form 1040.⁶

Line 1: the total early distribution included in income.
Line 2: the portion that qualifies for the exception, with exception code 05 for unreimbursed medical expenses above 7.5% of AGI.⁷
Line 3: Line 1 minus Line 2. The 10% penalty applies only to what’s left.

Skip Form 5329 and the IRS treats the whole distribution as penalty-bearing and sends you a bill. It’s one of the most common and most preventable mistakes with this exception.

Mistakes That Cost People the Penalty Break

Withdrawing more than the penalty-free amount. The exception shelters only the slice above the 7.5% floor. If your window is $4,000 and you pull $10,000, the extra $6,000 takes the full 10% hit.

Counting reimbursed expenses. An insurance payment covering part of your bill isn’t your expense. Calculating from the total billed amount rather than what you actually paid out of pocket can turn into a penalty assessment in an audit.

Mismatching the year. Expenses and withdrawal both have to land in the same calendar year. December bills followed by a January withdrawal do not qualify.

Assuming you have to itemize. You don’t. The penalty exception and the Schedule A deduction use the same expense definition but operate independently. Standard deduction filers can still use the exception.

Forgetting state taxes. The federal exception doesn’t automatically travel to your state return. Some states impose their own early withdrawal penalties or don’t honor every federal exception, so check your state’s treatment before counting on a fully penalty-free result.

1
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
2
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
4
Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs)
5
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
6
Internal Revenue Service. Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
7
Internal Revenue Service. 2025 Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts