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Early Retirement Withdrawal Rules and Strategies » How to Save for Retirement Even If You’re in Debt » Early Retirement Withdrawal Rules and Strategies



Sometimes circumstances force people into sticky situations. When unexpected expenses pile up and drain your emergency fund, you may think about turning to your retirement accounts for relief. Unfortunately, there can be a 10% penalty on withdrawals from most accounts. However, there are some exceptions.

If you’re thinking about tapping into your retirement fund early, here’s what you need to know. This guide covers how early withdrawal rules work when they don’t apply, and whether you should make an early withdrawal if you won’t get popped with a penalty.

What is an early withdrawal and what’s the magic age to avoid penalties?

When you prematurely take money out of a retirement account that has a defined withdrawal date, you are taking out an early withdrawal. Most retirement accounts come with an early withdrawal penalty to keep investors from taking money out early from a source of retirement income. To avoid these penalties, you typically need to wait until the age of 59½ to avoid early withdrawal penalties.

How does an early withdrawal penalty actually work?

When you withdraw money from your retirement account before you are 59½ years of age, you pay a 10% early withdrawal tax penalty. That’s in addition to any normal income taxes you may also be subject to paying on the funds.

For many retirement accounts, 401(k)s and traditional IRAs included, the income you take out of a retirement account counts as taxable income. So, no matter when you take the money out, it gets taxed for the year you withdrew it. You must note it on your income tax returns and pay taxes on it just as you pay taxes on income like wages.

When you take out money early, you pay those taxes plus an additional 10% tax penalty. So, you end up owing the IRS more than if you took out the money in retirement.

For example, say you are 54 and decide to take out $10,000 from your 401k. The $10,000 you withdraw would be considered income when you file your tax returns for the year. Your total income with that money included is $50,000. That puts you in the 22% tax bracket.

So, the $10,000 would end up being taxed at 22%. On top of this, you would have a 10% penalty for withdrawing early. Of the $10,000 withdrawn, $2,200 would go to the IRS to cover income taxes. But that the 10% penalty on the $10,000 means the IRS would take another $1,000. In the end, you would be left with $6,800.

This is a simplified example. The U.S. tax code is progressive, so you pay different rates on different parts of your income. But the 10% penalty for the early withdrawal is flat. So, no matter how much you make in a year, you will end up losing 10% of the money you withdraw early.

Warning: Early withdrawals can also affect your tax bracket!

Taxpayers pay different income tax rates based on how much they earn per year. Depending on how much you withdraw from the account, you could change tax brackets, meaning you’d pay a higher tax rate on part of your income.

401k early withdrawal rules

A 401(k) is one of the accounts that follows that early withdrawal rules of age 59½. If you take money out of your 401(k) before age 59½, it’s considered an early withdrawal.

In most cases, you’ll be hit with a 10% penalty on top of any applicable income taxes. But there are a few exceptions to this rule. So, if you’re slightly younger than retirement age and facing hardship or you plan to take periodic withdrawals, there are a few scenarios where the 10% penalty would not apply.

Exceptions to 401(k) early withdrawal penalties

Periodic Payment Exception

The IRS will waive the 10% tax penalty if you receive substantial equal periodic payments. That means you agree to take out a number of equal payments from your account after you stop working. And generally, you will receive these payments for at least five years or until you reach the age of 59½, whichever comes last. The rules that come with this option can be confusing, so it’s best to consult with a qualified financial advisor first.

Rollover Exception

If you roll a 401(k) over into another retirement plan within a certain time limit, you can avoid the withdrawal penalty fee. For example, you may convert your 401(k) into an IRA without penalties if you get laid off or leave your employer.

Divorce Split

If you are in the midst of a divorce and the court’s qualified domestic relations order requires you cash out a 401(k) to split with your ex, your withdrawal may be penalty-free.

Birth or Adoption Costs

When you have a child or adopt a child during the year, you can withdraw money from your 401k without penalties. This is a new exception to early withdrawals that came about with the Setting Every Community Up for Retirement Enhancement (SECURE) Act signed in 2020. There is a cap on this withdrawal exception of $5,000.


Payments made to a beneficiary or estate after the 401(k) holder dies are not subject to the early withdrawal penalties, regardless of the age of the beneficiary. So, your inheritors will not incur the penalty fee for withdrawing from your 401(k) if you pass away.

Leaving Your Job at Age 55

If you leave your job the year you turn 55 or later, you can qualify for an exception to the tax penalty. You can qualify for this exception at age 50 if you work in federal law enforcement, federal firefighting, customs, border protection, or air traffic control.

Military Reservist Called to Active Duty

As a military Reservist who has been called to active duty, you are also eligible for a penalty-free withdrawal in that year. The active-duty service must be for a period of at least 179 days.

Living in a Declared Disaster Area

The IRS often grants a range of tax breaks to people living in declared disaster areas. If you live in an area that the federal government officially deems as a disaster, you would be eligible for an early withdrawal without incurring any penalties.

You must live in a federally declared disaster area to qualify and the maximum distribution is $100,000. The unique thing about this early withdrawal is that you can claim the amount as income over a three-year period, beginning the year you take the distribution.

Disability Exception

If you become or are disabled, you may also avoid the tax penalty. You must have a total and permanent disability to qualify.

Overcontributions and Auto-Enroll Issues

If you overcontributed to your retirement account or were auto-enrolled in a 401(k) and want out, you may be able to withdraw the contributions and even the earnings without penalty.

IRS Account Levies

Finally, if the IRS issues a levy against you for unpaid taxes, the money withdrawn would be penalty-free. However, if you were to withdraw from your 401(k) to pay off unpaid taxes, you would incur the penalty.

401k hardship withdrawals

If you have an “immediate and heavy financial need” due to hardship, you would not be subject to the penalty. But be aware that not all hardship conditions waive early withdrawal penalties. It may be best to consult with your HR department to find out whether your plan provides penalty-free hardship withdrawals.

When you use a hardship withdrawal, you won’t be able to make any elective contributions to your 401(k) for six months. This can hamper any short-term retirement savings goals you may have.

You can qualify for a “safe harbor” hardship withdrawal if you:

  • have medical bills for yourself, your spouse, or any dependents
  • need money to buy a house, although this would not include money to make mortgage payments
  • require help with college tuition fees as well as room and board for you, your spouse, or any dependents or beneficiaries
  • need money to avoid foreclosure or eviction from a primary residence
  • cover funeral expenses for you, your spouse, children, dependents or beneficiary
  • had damage to your home and need repair it, certain costs qualify

For a safe harbor withdrawal, you must limit the amount you take to what you need to cover the immediate and heavy financial need. You must also exhaust all other possible sources of money, including:

  • Insurance
  • Liquidating assets
  • Increasing your pay by discontinuing elective deferrals and after-tax contributions
  • Loans

Basically, the IRS doesn’t want you to take a hardship withdrawal if you can qualify for a loan or cancel your AD&D insurance.

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IRA early withdrawal rules

There may come a time when you unexpectedly need money and may consider withdrawing funds from your IRA. Make sure you understand the rules, regulations, and penalties involved with a withdrawal.

Traditional IRA early withdrawal rules

If you withdraw money from a traditional IRA before the age of 59½, you will pay both federal and state taxes on the amount you withdraw. On top of this, you can face a 10% penalty unless you use the funds for the specific reasons outlined below.

Roth IRA

When it comes to Roth IRAs, you can remove your original contributions without incurring any penalty. You don’t need a specific reason or need to worry about qualifying for an exception.

For example, if you contributed $10,000 over two years, and your contributions grew to $12,000, then you could withdraw the original $10,000 contribution without taxes and penalties.

If you wanted to withdraw the $2,000 in earnings, however, then you would face a 10% tax penalty.

Of course, there are exceptions here, too. If five years have passed since your first contribution, then you won’t have to pay the 10% tax if you ALSO meet one of the following criteria:

  • You are 59½ of age
  • The withdrawal is for a first-time home purchase, medical expenses, health insurance while unemployed, or qualified education expenses
  • There is a death or disability to the account holder

Penalty-free IRA early withdrawals

Early IRA withdrawals are never recommended, but unforeseen circumstances may it necessary. The following exceptions allow you to make penalty-free withdrawals from both types of IRAs.

Unreimbursed medical expenses

If you don’t have health insurance or have out-of-pocket medical expenses that aren’t covered by it, you may make penalty-free withdrawals. To qualify, you must pay the medical expenses in the same calendar year you make the withdrawal. Your unreimbursed medical expenses must also exceed 10% of your adjusted gross income (AGI).

For example, if your AGI is $100,000 and your unreimbursed medical expenses are $20,000, then the most you can distribute penalty-free is $10,000, which is the difference between $20,000 and 10% of your AGI ($10,000).

Health insurance premiums during unemployment

If you are unemployed, you can take penalty-free distributions from your IRA to help you pay health insurance premiums. However, there are certain conditions you must meet to be eligible. This exception only applies if you:

  • lost your job
  • received 12 consecutive weeks of unemployment compensation
  • took your distributions during the year you received unemployment compensation or the following year
  • received your distributions no later than 60 days after you go back to work.

Total and permanent disability

If you suffer a total and permanent disability, the IRS allows you to withdraw money without incurring the 10% penalty. You can use the distributions for any purpose. However, you may need to provide your plan administrator with proof of the disability before they sign off on a penalty-free withdrawal.

Higher education expenses

Since college degrees are pricey, especially when you’re footing the bill, IRAs allow you to pay for qualified higher education expenses without incurring the 10% penalty. Qualified higher education expenses include:

  • tuition
  • fees
  • books
  • supplies
  • equipment required for enrollment, such as laptops
  • room and board if you are enrolled at least part-time

Check with your school to make sure your expenses satisfy the requirements before you withdraw the money.

Inherited IRAs

If you are the beneficiary of an IRA, your withdrawals would not be subject to the 10% early withdrawal penalty. However, this exception does not apply if you:

  • are the spouse of the original account holder
  • you’re the sole beneficiary
  • you elected to roll over the inherited funds into your own non-inherited IRA

Building, buying, or rebuilding a home

If you want to build, buy, or rebuild an inherited home, you can withdraw up to $10,000 from your IRA penalty-free.

To qualify, you must be a first-time homebuyer. However, you could still qualify as a first-time homebuyer even if you have been a homeowner in the past. If you have not owned a home in at least two years, you count as a first-time homebuyer. You can also make penalty-free withdrawals to help a parent, child, or grandchild if they are a first-time homebuyer.

Substantial equal periodic payments (SEPPs)

A substantial equal periodic payment (SEPP) grants you the ability to make regular withdrawals from your IRA for a few years. The IRS allows you to do so penalty-free should you meet certain requirements. To use this option, you must withdraw the same amount each year for five years or until you are 59½ years of age, whichever comes later.

Fulfilling an IRS levy

If you have unpaid federal taxes, the IRS can draw from your IRA to foot the bill. In this case, the 10% penalty won’t apply. However, if you withdraw the money to pay your taxes and avoid a levy, then the 10% penalty would apply.

Getting called to active duty

Some qualified Reservist distributions are not subject to the 10% penalty. Generally, these distributions are made to military Reservists or National Guard who have been called to active duty for at least 179 days after September 11, 2001. You can repay the withdrawn amounts even if the repayments exceed annual contribution limits. And you would need to repay them within two years of the end of your active-duty service. However, repayment is not required.

Should you use an early 401k withdrawal or IRA withdrawal?

In most cases, the answer is no. Even if you face financial hardship or know you can qualify for an exception, it’s still not advisable to make an early withdrawal. You want to pursue every alternative you have first before you touch your retirement savings.

Think of it this way. When you withdraw money from your retirement account, you won’t just be out that money. You will also be out the growth that you could have enjoyed on that money until you put it back—if you put it back. So, while the early withdrawal may help you get through a current hardship, it means less money for you in retirement. You could face retirement delays, need to keep working part-time in retirement, or face the challenge of trying to survive on Social Security benefits alone.

Consider taking out a 401(k) loan

If you need to take withdraw money from your 401(k) and can’t get approved an exception, you may also want to consider a 401(k) loan. A 401(k) loan allows you to borrow money from your retirement account without incurring any taxes or penalty fees.

There are some requirements:

  • You must pay the loan back within five years.
  • You can only borrow up to $50,000 or half the amount vested in the plan, whichever is the lesser of the two.

If you use the loan for a down payment on a home, you get a longer repayment period. But be aware that if you leave your company, there will be a shorter window to pay the loan back. Generally, you have less than a year or until the subsequent year’s Tax Day to pay it back.

Again, keep in mind that the loan will mean that you lose out on the growth you would have enjoyed while the money is out. So, even though the loan means you put the money back, you still lose out.

Always consider every other avenue for relief carefully before you apply for a 401k loan. And never use a 401k loan to pay off things like credit card debt. As painful as it may be, it’s better to declare bankruptcy and deal with credit damage than rob your retirement fund.

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Early withdrawal strategies

If you must take an early withdrawal from a retirement account, it’s important to do so wisely. Keep in mind that the older you are, the more an early withdrawal will impact you in retirement.

If you are in your early 30s and adopting a child, taking out $5,000 from your 401k is a loss you can make up. If you’re 57 and take out $5,000 to help your son or daughter buy a home, there is less time to recoup those lost earnings.

No matter what age you are, make sure to follow these tips:

  1. Explore all other options for overcoming financial challenges first.
  2. Only withdraw if you can qualify for an exception and avoid an early withdrawal penalty.
  3. Only withdraw the funds you absolutely need to survive and no more than that.
  4. Have a plan to put the funds back as soon as possible.
  5. Consider upping your contributions or making extra contributions once you recover from the hardship to recoup the lost growth.


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