IRA Early Withdrawal Penalty: Rules, Exceptions, and Reporting

Pulling money out of a traditional IRA before age 59½ generally costs you a 10% additional tax on top of the ordinary income tax you already owe on the distribution, and that IRA early withdrawal penalty can eat roughly a third of the amount you take out once federal income tax is added in.¹ Federal law carves out a long list of exceptions, and the SECURE 2.0 Act added several more starting with distributions taken after December 31, 2023. Whether the penalty applies to your withdrawal depends on your age, the type of IRA, the reason for the distribution, and in some cases the calendar.

How the 10% Additional Tax Works

Under 26 U.S.C. § 72(t), the 10% charge applies to the portion of an early distribution that’s included in your gross income.¹ It does not replace regular income tax. It sits on top of it. Because traditional IRA contributions are typically pre-tax, the full withdrawal amount usually counts as taxable income. Someone in the 22% federal bracket taking a $10,000 early distribution can lose $3,200 before state taxes get involved.

The additional tax is calculated separately on Form 5329 and carried to your Form 1040.² It applies to the earnings portion of Roth distributions and, in some cases, to converted amounts withdrawn too soon.

SIMPLE IRA: A 25% Penalty in the First Two Years

If your IRA is a SIMPLE IRA offered by an employer, watch the calendar. Early withdrawals taken within your first two years of participation face a 25% additional tax rather than the usual 10%.³ The two-year clock runs from the date your employer first deposited contributions into the account. After that, the standard 10% applies to any early distribution that doesn’t qualify for an exception. People who change jobs frequently sometimes trip over this without realizing it.

Exceptions to the Penalty

Federal law lists specific situations that waive the 10% additional tax. The distribution is still ordinary income; only the penalty disappears. The conditions have to be met at the time of the withdrawal, and the IRS uses reporting codes on Form 1099-R and exception numbers on Form 5329 to track whether a distribution qualifies.

Long-Standing Exceptions

Death of the account holder, with distributions paid to a beneficiary or estate.¹
Total and permanent disability, meaning a physical or mental condition expected to last indefinitely or result in death.⁴
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for the year, up to the amount above that threshold.⁵
Health insurance premiums while unemployed, if you’ve received unemployment compensation for at least 12 weeks. The withdrawal can cover premiums for you, your spouse, and dependents.⁵
Qualified higher education expenses (tuition, fees, books, supplies, and room and board for a student enrolled at least half-time) for you, your spouse, your children, or your grandchildren.¹
First-time homebuyer costs, capped at $10,000 in lifetime distributions, used to buy, build, or rebuild a principal residence.⁵
Substantially equal periodic payments (SEPP), a series of roughly equal withdrawals based on your life expectancy, taken at least annually. The schedule must continue for five years or until you reach 59½, whichever is later. Modifying it early retroactively triggers the penalty on all prior payments.⁶
IRS levy against the IRA to satisfy a tax debt.⁵
Qualified military reservists called to active duty for more than 179 days, during the active duty period.⁷

SECURE 2.0 Exceptions (Distributions After December 31, 2023)

Terminal illness, if a physician certifies at or before the time of the distribution that you have a condition reasonably expected to result in death within 84 months. The certification must come from a medical doctor or doctor of osteopathy.¹
Birth or adoption, up to $5,000 per child following a birth or a finalized legal adoption.⁵
Domestic abuse, up to the lesser of $10,000 (indexed for inflation) or 50% of the account balance. The distribution must be taken within one year of the incident, and the account holder self-certifies eligibility.⁵
Emergency personal expenses, one penalty-free withdrawal per calendar year up to the lesser of $1,000 or your vested balance above $1,000. The amount can be repaid within three years, and you generally can’t take another emergency distribution until you’ve repaid or made equivalent contributions.⁵
Qualified disaster recovery, up to $22,000 per federally declared disaster. These can be repaid within three years, and the income can be spread across three tax years.⁸

The IRS does not grant these waivers retroactively. If you don’t qualify at the time of the withdrawal, you owe the penalty.

Roth IRA Withdrawals Follow Different Rules

Roth contributions are made with after-tax dollars, so distributions come out in a defined order: your original contributions first, then converted amounts, then earnings.⁹ Your own contributions can be withdrawn tax-free and penalty-free at any time, at any age.

The penalty enters when you reach the conversion and earnings layers. If you converted traditional IRA money to a Roth and withdraw the taxable portion of that conversion within five years while still under 59½, the 10% applies. Each conversion starts its own separate five-year clock.⁹ Earnings withdrawn before the account has been open five years or before you turn 59½ face both income tax and the 10% penalty unless an exception applies. Keeping records of your contribution and conversion history is what lets you sort this out at tax time.

The 60-Day Rollover Trap

Many accidental penalties come from botched indirect rollovers. When you receive a distribution intending to move it to another IRA, you have 60 days to redeposit it. Miss the deadline and the IRS treats the whole amount as a taxable distribution, with the 10% penalty attached if you’re under 59½.¹⁰

There’s also a frequency cap. You can only do one indirect rollover across all your IRAs (traditional, Roth, SEP, and SIMPLE combined) in any 12-month period. A second within that window becomes taxable income.¹⁰ Direct trustee-to-trustee transfers sidestep both the 60-day window and the once-per-year limit.

Reporting the Withdrawal and Claiming an Exception

Your IRA custodian sends you a Form 1099-R after any year you take a distribution. Box 7 carries a distribution code that tells the IRS how to classify the withdrawal.¹¹ The common ones for early distributions:

Code 1: early distribution, no known exception. Your custodian uses this when you’re under 59½ and they can’t tell whether an exception applies. You’ll see Code 1 even when you actually qualify.
Code 2: early distribution, exception applies. Used when the custodian knows one qualifies, such as a SEPP arrangement or a Roth conversion.
Code 3: disability.
Code 4: death distribution to a beneficiary.
Code J: early distribution from a Roth IRA, no known exception.

If your 1099-R shows Code 1 or Code J but you qualify for an exception, you claim it on Form 5329. Enter the total early distribution on Line 1, then identify the specific exception number on Line 2 to reduce or eliminate the penalty.¹² Getting the exception number wrong, or leaving Line 2 blank, means the IRS calculates the full 10%. Form 5329 is filed with your Form 1040.¹³

Withholding Usually Isn’t Enough

When you take an IRA distribution, your custodian withholds 10% for federal income tax by default. You can raise the rate up to 100%, lower it, or opt out entirely using Form W-4R.¹⁴ The catch: 10% often falls short. Someone in the 22% or 24% bracket who also owes the 10% additional tax will face a substantial balance at filing.

A large early withdrawal can also trigger an underpayment penalty on Form 2210 if it pushes your total tax well past what your withholding and estimated payments cover. You can head this off by increasing withholding on the distribution or making a quarterly estimated payment in the same quarter. The safe harbor is paying at least 90% of the current year’s tax or 100% of last year’s (110% if your adjusted gross income exceeded $150,000).¹⁵

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. About Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
3
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
4
Internal Revenue Service. Retirement Topics – Disability
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. Substantially Equal Periodic Payments
7
Internal Revenue Service. Armed Forces’ Tax Guide
8
Internal Revenue Service. Instructions for Form 8915-F
9
Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs)
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
11
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
12
Internal Revenue Service. Instructions for Form 5329
13
Internal Revenue Service. Instructions for Form 5329
14
Internal Revenue Service. Pensions and Annuity Withholding
15
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty