Early Withdrawal Penalties and Exceptions: What Taking Retirement Money Before 59½ Really Costs
Withdrawals from retirement accounts before 59½ generally face income tax plus a 10% additional tax. A long list of exceptions exists, and some apply only to IRAs or only to employer plans. Here is the math and the main exceptions.
Retirement accounts are meant for retirement, and the tax code enforces that. Taxable withdrawals before age 59½ generally owe regular income tax plus a 10% additional tax, unless an exception applies.
What it costs
A hypothetical $30,000 withdrawal from a traditional 401(k) at age 45, in a 22% federal bracket:
Show the numbers behind this chart
| Amount | |
|---|---|
| Kept | $20,400 |
| Income tax | $6,600 |
| 10% additional tax | $3,000 |
The money also stops growing for retirement. At 6% for 20 years, $30,000 would have grown to about $96,000 before tax.
Main exceptions to the 10% additional tax
Income tax usually still applies to taxable amounts. Some exceptions cover only IRAs, some only employer plans.
| Exception | IRAs | Employer plans |
|---|---|---|
| Age 59½ or older | Yes | Yes |
| Separation from service in or after the year you turn 55 (50 for certain public safety employees) | No | Yes |
| Substantially equal periodic payments | Yes | Yes |
| Total and permanent disability | Yes | Yes |
| Death (paid to beneficiaries) | Yes | Yes |
| Unreimbursed medical expenses above 7.5% of AGI | Yes | Yes |
| Birth or adoption, up to $5,000 per child | Yes | Yes |
| One emergency personal expense per year, up to $1,000 | Yes | Yes |
| Domestic abuse victims, within limits | Yes | Yes |
| Qualified higher education expenses | Yes | No |
| First-time homebuyer, up to $10,000 | Yes | No |
| Health insurance premiums while unemployed | Yes | No |
| Terminal illness | No | Yes |
| Qualified domestic relations order (QDRO) payments | No | Yes |
| Qualified disaster recovery distributions, within limits | Yes | Yes |
The IRS publishes the full list with conditions. Several of these were added or expanded recently.
Roth accounts
Roth IRA contributions can be withdrawn at any time without tax or penalty. Earnings withdrawn early may be taxed and penalized unless an exception applies or the distribution is qualified. Roth accounts in employer plans follow different ordering rules.
Alternatives to consider first
- An emergency fund; see building an emergency fund.
- A 401(k) loan, which has its own risks.
- Hardship programs from creditors, or lower-cost borrowing.
The takeaway
An early withdrawal can cost a third or more of the amount in taxes and penalties, plus lost growth. Check whether an exception applies, and note that some apply only to IRAs or only to employer plans. Moving money between account types can change which exceptions are available.
Sources
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