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

You can take an IRA withdrawal for medical expenses penalty-free, but only up to a limit: the portion of your unreimbursed medical costs that exceeds 7.5% of your adjusted gross income for the same tax year. Anything above that threshold escapes the 10% early withdrawal penalty. The distribution itself is still ordinary taxable income. A separate rule also lets you pull from an IRA penalty-free to pay health insurance premiums after a job loss.

How the 7.5% AGI Rule Works

Take money out of a traditional IRA before age 59½ and you normally owe a 10% additional tax on top of regular income tax.¹ The medical expense exception removes that 10% on the slice of your withdrawal matching unreimbursed medical costs above 7.5% of AGI.²

Two things confuse people. The exception is not a tax break on the distribution itself. You still owe ordinary income tax on every dollar pulled from a traditional IRA. Only the extra 10% goes away. And you do not have to itemize to use it. The statute says the medical amount is figured “without regard to whether the employee itemizes deductions for such taxable year.”² Standard deduction filers can still claim the penalty exception.

The withdrawal and the medical costs have to fall in the same tax year, but you don’t need to trace IRA dollars to specific bills. Pay $15,000 in qualifying medical expenses in June and take an $8,000 IRA withdrawal in November of that year, and the timing lines up. Bills in December followed by a withdrawal the next January do not.

Calculating Your Penalty-Free Amount

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

Multiply your AGI by 0.075. That’s the floor. An AGI of $80,000 gives a $6,000 floor.
Subtract the 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. Pull more, and the excess gets the penalty on top of regular tax.

The higher your income, the higher the floor, and the smaller the penalty-free window. Someone with $200,000 in AGI needs more than $15,000 in medical costs before a dollar qualifies. The exception is built for years when medical spending is large relative to income.

What Counts as a Qualified Medical Expense

The IRS uses the same definition here as for the Schedule A itemized deduction: costs for diagnosing, treating, or preventing a physical or mental condition, or for care affecting a structure or function of the body.³

Costs that typically qualify:

Payments to doctors, dentists, surgeons, psychologists, and other licensed practitioners.
Prescription drugs and insulin. Over-the-counter medications without a prescription do not count.
Hospital care, diagnostic tests, and surgical procedures.
Prescribed medical equipment such as hearing aids, wheelchairs, and crutches.
Long-term care insurance premiums, up to an age-based annual cap.

Cosmetic surgery for appearance only, gym memberships (unless a doctor prescribes a specific program to treat a diagnosed condition like obesity), non-prescription vitamins and supplements, and funeral costs do not qualify.³

Only unreimbursed amounts count. If insurance pays part of a bill, subtract that reimbursement before running the 7.5% math.³ If a reimbursement arrives the following year for expenses you already used to justify a penalty-free withdrawal, you may need to report that reimbursement as income on the later return.

Keep the paper trail. The IRS audits medical claims. Hold onto itemized bills, explanation-of-benefits statements, pharmacy receipts, and proof of payment. You carry the burden of showing each expense was for medical care rather than cosmetic or general wellness spending.

A Second Exception for Health Insurance After Job Loss

The tax code has an independent penalty exception for people who lose their jobs and use IRA money to pay health insurance premiums. This one has no AGI threshold.²

Three conditions apply:

You received unemployment compensation for at least 12 consecutive weeks.
The IRA withdrawal happens in the year you received unemployment compensation or the year after.
The penalty-free amount cannot exceed what you actually paid for health insurance covering yourself, your spouse, and your dependents.

Self-employed individuals who would have qualified for unemployment but for being self-employed can also use this exception.² Once you’ve been re-employed for 60 days or more, the exception no longer covers new withdrawals.

Roth IRAs Usually Don’t Need the Exception

Roth IRA distributions come out in a set order: contributions first, then conversions, then earnings.⁴ Contributions were made with after-tax dollars, so you can pull them out at any age with no tax and no penalty. If you contributed $40,000 over the years and the account is now worth $55,000, that first $40,000 comes out clean without invoking any exception.

The medical exception only matters for Roth owners once withdrawals reach the earnings portion before age 59½. At that point the earnings are subject to income tax plus the 10% penalty unless an exception applies. The medical rule can strip the penalty, but the earnings remain taxable unless the withdrawal is a qualified distribution.⁴ Most Roth owners covering medical bills never get that deep into the account.

Reporting the Withdrawal Correctly

Your IRA custodian sends Form 1099-R showing the gross distribution. Box 7 usually carries code 1 (early distribution, no known exception), because the custodian has no idea why you took the money.⁵ Claiming the exception is on you at filing time.

You claim it on Form 5329, which attaches to your Form 1040.⁶ On Line 1, enter the total early distribution amount included in income. On Line 2, enter the portion covered by the exception, using exception code 05 for unreimbursed medical expenses above 7.5% of AGI.⁷ Line 3 is the difference, and the 10% penalty applies only to that remainder.

Skip Form 5329 and the IRS treats the whole distribution as subject to the 10% penalty and sends a bill. It’s one of the most common and most avoidable errors with this exception.

Mistakes That Cost People the Penalty Exception

Withdrawing more than the penalty-free amount. The exception covers only the piece of your medical costs above 7.5% of AGI. If your window is $4,000 and you take $10,000, the extra $6,000 gets the full 10%. Sizing the withdrawal to the math matters.

Counting reimbursed bills. Insurance payments are not your expense. Calculating from the total billed amount instead of out-of-pocket cost sets up a penalty during an audit.

Splitting the events across tax years. Expenses and withdrawal must land in the same calendar year. December bills paid before a January withdrawal do not qualify.

Assuming itemizing is required. The penalty exception and the Schedule A deduction are separate mechanisms that share a calculation. You can take the standard deduction and still avoid the penalty.

Overlooking state rules. The federal exception does not automatically apply to your state return. Some states impose their own early withdrawal penalties or don’t mirror every federal exception. Check state rules before assuming the withdrawal is penalty-free everywhere.

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