What Happens When You Withdraw Retirement Funds Early?

Early withdrawals from retirement plans may be taxed twice

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You must often include the money as taxable income on your tax return when you withdraw retirement funds early from your IRA, 401(k), or other retirement savings plan. Early withdrawals are often subject to an extra penalty as well, as much as 25% in some cases.

This penalty kicks in when you take a distribution before reaching a certain age, 59½ for most plans. But there are some exceptions to this rule.

Key Takeaways

  • The IRS imposes a penalty on early distributions from retirement funds before age 59½.
  • The penalty is equal to 10% of your withdrawal, and many distributions are subject to income tax as well.
  • The penalty for early withdrawals from SIMPLE IRAs is 25%.
  • You may be exempt from the penalty, depending on why you take the money out and what you spend it on.

The Penalty Tax

The early withdrawal penalty is 10% of the taxable amount you take as an early distribution from an individual retirement account (IRA), a 401(k), a 403(b), or other qualified retirement plan before reaching age 59½.

The distribution must also be included in your taxable income. You'll pay ordinary income tax on the distribution amount in addition to the penalty. Taxes are often withheld from distributions, but the amount withheld might not be enough to cover all your penalty if you're also subject to it.


The penalty increases to 25% if you take the distribution from a SIMPLE IRA within two years of the date you first began participating in the plan.

Exceptions for IRAs

You can withdraw money from an IRA before age 59½ in a number of cases:

  • You had a "direct rollover" to a new retirement account by way of a trustee-to-trustee transfer.
  • You received a payment, but you rolled the money over into another qualified retirement account within 60 days.
  • You were permanently or totally disabled at the time you took the withdrawal.
  • You were unemployed and used the money to pay for health insurance premiums.
  • You paid for medical expenses exceeding 7.5% of your adjusted gross income (AGI).
  • You paid for college expenses for yourself, a spouse, a dependent, or a grandchild.
  • You received the distribution as part of "substantially equal periodic payments" over your lifetime.
  • The IRS levied your retirement account to pay off tax debts.
  • You're a qualified first-time homebuyer, and you took distributions of up to $10,000. This doubles to $20,000 ($10,000 each) if you're married and purchasing a first-time home together.
  • The withdrawal is ordered as part of a divorce or marital separation under the terms of a Qualified Domestic Relations Order.


You cannot have owned a home in the prior two years to qualify for the homebuying exclusion. Only $10,000 of the retirement distribution will avoid the penalty. You'll pay a penalty tax on $5,000 of the withdrawal if you take out $15,000.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act made a one-time change when it was signed into law in March 2020. You weren't subject to the penalty if you took an early withdrawal in tax year 2020. The withdrawal still had to be included in your taxable income. But the CARES Act provides that you can divide it up and pay income tax on it over three years.

Exceptions for 401(k)s or 403(b)s 

Exceptions for early distributions from qualified retirement plans include the following cases:

  • Distributions were made upon the death or total and permanent disability of the plan participant.
  • You were age 55 or older and you retired or left your job. This age threshold is reduced to 50 for those who worked for public transportation for state or local governments.
  • You received the distribution as part of "substantially equal periodic payments" over your lifetime. (This rule only applies if you've stopped working for your employer.)
  • You paid for medical expenses exceeding 7.5% of your adjusted gross income.
  • The distributions were required by a divorce decree or separation agreement under the terms of a "qualified domestic relations court order." 
  • You received distributions of dividends from an employee stock ownership plan (ESOP).
  • You are a qualified reservist. (This applies to reservists who were called into action after the attacks on September 11, 2001.)
  • They were distributions from federal plans under a phased retirement program.
  • They were permissive withdrawals from a plan with automatic enrollment features.
  • They were corrective distributions and/or earnings associated with excess contributions.


Congress will sometimes extend exceptions for those who were hit by disasters. You might want to explore any disaster-related relief options if you've been impacted by an extreme weather event.

Nontaxable Withdrawals

You won't be hit with a penalty if you take a distribution on which no tax is due. Your contribution represents principal only. You paid tax on those dollars before you invested them. It probably won't trigger a penalty if you didn't take a tax deduction for your contributions, and your employer didn't divert funds to your plan before calculating taxes on your pay.

This also applies to Roth IRA contributions. These contributions are made with after-tax dollars.

Rollovers are also nontaxable. They don't incur a penalty.

The Age 50 Rule

Certain government employees can access their retirement savings starting at age 50 rather than waiting until age 55 if they retire or leave their jobs early. These employees include nuclear materials couriers, air traffic controllers, U.S. Capitol Police, Supreme Court Police, diplomatic security special agents, and state and local public safety employees.

This rule applies to distributions from governmental retirement plans for employees who separate from service after reaching 50 years of age.


The rule regarding government employees went into effect in 2015 as part of the Defending Public Safety Employees' Retirement Act of 2015.

Reporting the Early Distribution Penalty

You can figure the additional tax directly on your Form 1040, or you can use Form 5329.

You would figure out the extra penalty on Form 5329 if you qualify for one of the exceptions, and your retirement plan did not report the exception in box 7 of Form 1099-R. You don't have to fill out Form 5329 if the exception is properly coded in box 7 of your 1099-R form. Report the tax on Schedule 2, which must accompany your tax return.

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