Pulling money out of a traditional 401(k) or IRA before age 59½ generally triggers the early retirement withdrawal penalty: an extra 10% federal tax on top of the ordinary income tax you already owe on the distribution.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Between the two, a quarter to nearly half of your withdrawal can disappear before it reaches your bank account. Federal law lists more than a dozen situations that waive the 10%, and the SECURE 2.0 Act added several more starting in 2024.
What the 10% Actually Costs You
The 10% is a penalty layered on top of income tax, not a replacement for it. The full taxable portion of a traditional 401(k) or IRA withdrawal gets added to your income for the year and taxed at your federal and state marginal rates. On a $30,000 early withdrawal, someone in the 22% federal bracket would owe roughly $6,600 in income tax plus a $3,000 penalty, losing close to a third before state tax even enters the picture.
One account carries a steeper version. Withdrawals from a SIMPLE IRA within the first two years of participation face a 25% additional tax rather than 10%.2Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules That two-year clock starts when your employer first deposits contributions into the account, not when you enrolled.
You report the additional tax on IRS Form 5329, filed with your annual return, and you use the same form to claim an exception if one applies.3Internal Revenue Service. About Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
Roth Accounts Follow Different Rules
Because you already paid tax on Roth contributions, you can withdraw your original Roth IRA contributions at any time with no tax and no penalty. That money is already yours.
Earnings are the piece the penalty touches. To pull out investment gains from a Roth IRA tax-free and penalty-free, the account must have been open at least five years and you must be 59½ or older, disabled, or using up to $10,000 for a first-time home purchase.4Internal Revenue Service. Roth Account in Your Retirement Plan The five-year clock runs from January 1 of the tax year of your first Roth contribution. Each Roth conversion from a traditional IRA starts its own separate five-year period.
Take earnings out before meeting both conditions and they’re taxed as ordinary income plus the 10% penalty, the same treatment as a traditional account. Roth 401(k) distributions before 59½ come out as a proportional mix of contributions and earnings, so you can’t cherry-pick the tax-free contribution portion the way you can with a Roth IRA.
When the 10% Penalty Goes Away
Federal law lists specific situations where the penalty drops off. Income tax on the distribution usually still applies. Only the 10% disappears. Which exceptions you can use depends on whether the money is in an IRA, a workplace plan, or either.
Exceptions That Apply to Both IRAs and Workplace Plans
- Substantially Equal Periodic Payments (SEPP). You commit to a schedule of fixed annual withdrawals calculated from your life expectancy. Payments must continue for at least five years or until you turn 59½, whichever is later. Stopping early or changing the amount triggers retroactive penalties on every distribution you’ve already taken.5Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
- Total and permanent disability certified by a physician.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Unreimbursed medical expenses, but only the portion above 7.5% of your adjusted gross income qualifies.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Birth or adoption of a child. Each parent can withdraw up to $5,000 per child penalty-free, and you can repay the money to your account later.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Distributions to a beneficiary after the account owner’s death, regardless of the beneficiary’s age.
- An IRS levy on the account to collect a tax debt.
Exceptions Limited to Workplace Plans
- The Rule of 55. Leave your job during or after the calendar year you turn 55 and you can withdraw from that employer’s plan penalty-free. It only applies to the plan at the employer you separated from, not old 401(k)s at previous jobs, and not IRAs. State and local public safety employees get a lower threshold of age 50.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Terminal illness certified by a physician. The IRS’s current published exception list marks this as not applicable to IRAs.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Payments to a former spouse under a qualified domestic relations order.
Exceptions Limited to IRAs
- First-time home purchase, up to a $10,000 lifetime limit. “First-time” is generous: it covers anyone who hasn’t owned a home in the previous two years, and the money can also go toward a home for your spouse, child, grandchild, or parent.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Qualified higher education expenses: tuition, fees, books, supplies, and room and board for students enrolled at least half-time. This one doesn’t extend to 401(k)s.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 consecutive weeks.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
One point worth flagging: a 401(k) hardship distribution is not, by itself, a penalty exception. A plan may allow a withdrawal for an immediate and heavy financial need, but you still owe the 10% unless the specific expense also matches a statutory exception like medical costs above 7.5% of AGI.6Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
Newer Waivers Under SECURE 2.0
The SECURE 2.0 Act added several penalty-free categories, most effective in 2024 or 2025. These apply to both IRAs and workplace plans unless noted.
- Federally declared disasters. You can withdraw up to $22,000 without the 10% penalty if you live in the disaster area. The taxable income can be spread over three years, and repaying the full amount within three years reverses the tax.7Internal Revenue Service. Disaster Relief Frequently Asked Questions: Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
- Emergency personal expenses. One penalty-free withdrawal of up to $1,000 per calendar year for unforeseeable or immediate needs. The cap isn’t indexed for inflation. You can repay within three years, but you can’t take another emergency distribution from the same plan until you’ve either repaid the last one or made enough new contributions to cover it.8Internal Revenue Service. Notice 2024-55, Certain Exceptions to the 10 Percent Additional Tax
- Domestic abuse survivors. You can withdraw the lesser of $10,000 (adjusted for inflation) or 50% of your vested balance. Self-certification is enough; no police report or court order is required. The income can be spread over three tax years and the withdrawal can be repaid within three years.
Ways to Skip the Penalty Entirely
Borrow from a Workplace Plan Instead
If you need cash but want to avoid the tax hit and a permanent reduction to your balance, a loan from your workplace plan may be the better route. Most 401(k), 403(b), and 457(b) plans allow participant loans. IRAs do not; borrowing from an IRA is a prohibited transaction that can disqualify the whole account.9Internal Revenue Service. Retirement Topics – Plan Loans
The maximum is the lesser of $50,000 or half your vested balance, with a $10,000 floor for smaller accounts. Repayment runs in level installments at least quarterly over no more than five years, with a longer term allowed for a primary residence purchase.10Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The interest you pay goes back into your own account.
Two real costs sit behind the numbers. Borrowed money is out of the market for the life of the loan, so you lose whatever growth it would have earned. And if you leave your employer with an outstanding balance, you generally need to repay it by the tax filing deadline for that year, or the remaining amount is treated as a taxable distribution with the 10% penalty added on top.
Roll Over Directly to Avoid the Distribution
If your goal is to move money between retirement accounts rather than spend it, a direct rollover sidesteps both the penalty and the mandatory withholding. The funds transfer straight from one plan or IRA to another without passing through your hands.11Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions If you take the money yourself first, you have 60 days to redeposit it into an eligible account or the full amount becomes a taxable distribution subject to the penalty.12Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs) Only one IRA-to-IRA indirect rollover is allowed per 12-month period.
Withholding at the Time of Distribution
How much comes out upfront depends on the account. Workplace plans withhold 20% of a taxable distribution for federal income tax automatically, and you cannot decline it.13Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules On a $50,000 workplace distribution, $40,000 lands in your account and $10,000 goes to the IRS as a credit toward your annual tax bill. If the actual income tax plus 10% penalty come out to more than that, you owe the difference at filing time.
IRA distributions default to 10% withholding, and you can elect out or choose a different percentage.11Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Lower withholding doesn’t lower the bill. It just moves more of it to April.