Early withdrawal penalty
Also called 10% additional tax, early distribution penalty
The 10% additional federal tax usually charged on money taken from a retirement account before age 59½, on top of regular income tax.
What it means
Withdrawals from 401(k)s, traditional IRAs and similar accounts before age 59½ generally face a 10% additional tax on the taxable amount, plus ordinary income tax. The rule exists to keep retirement money for retirement. SIMPLE IRA withdrawals in the first two years of participation can face 25%.
There are many exceptions, including disability, death, a series of substantially equal periodic payments, and leaving an employer in or after the year one turns 55 (for that employer’s plan). IRAs have other exceptions, such as qualified higher education costs and up to $10,000 over a lifetime for a first home. Separately, banks charge an early withdrawal penalty on CDs, usually a set number of months of interest.
Example
Suppose someone age 40 withdraws $10,000 from a traditional IRA and is in a hypothetical 22% bracket. They owe $2,200 of income tax plus a $1,000 additional tax, leaving $6,800 of the $10,000.
How it’s used
- Weighing a retirement withdrawal in an emergency
- Planning an early retirement
- Comparing account types
Good to know
- Roth IRA contributions, unlike earnings, can be withdrawn at any age without tax or penalty.
- A 401(k) loan, where the plan allows one, avoids the penalty but carries its own risks.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.