IRA early withdrawal penalty: the 10 % and the exceptions that only IRAs have
An IRA plays by its own rules before 59½: some doors that a 401(k) offers are shut, and three others open only here.
You keep
$16,400
$8,600 goes to tax and penalty (34 %): 10 % additional tax on the taxable amount.
| 10 % additional tax | $2,500 |
| Federal income tax | $4,850 |
| State income tax | $1,250 |
| Withheld at payout | $0 |
Worked out by Radif Partners · How we calculate · figures read on irs.gov and healthcare.gov · not personal financial advice
A withdrawal from a traditional IRA, SEP or SIMPLE IRA before age 59½ owes a 10 % additional tax on the taxable amount, on top of income tax, unless an exception applies; from a SIMPLE IRA within the first two years of participation the rate is 25 % instead. IRAs have three exceptions that 401(k) plans do not: qualified higher education expenses, a first-time home purchase up to $10,000, and health insurance premiums paid while unemployed. They also lose two that plans have: the rule of 55 and payments to an ex-spouse under a qualified domestic relations order. A 38-year-old taking $25,000 for a first home pays the 10 % only on the part above $10,000, $1,500. The mandatory 20 % withholding of employer plans does not apply to IRA payouts, so the tax is settled on the return. Roth IRA contributions come out free at any age.
Same 10 %, different list of ways out
The additional tax is the same 10 % for an IRA as for a 401(k). The IRS exceptions table puts IRAs, SEPs, SIMPLE IRAs and SARSEPs in one column and qualified plans such as a 401(k) in another, and the two columns do not match (IRS exceptions table). The pattern is easy to read once laid side by side: the IRA-only exceptions concern a house, school and health insurance, while the plan-only ones are tied to leaving an employer and to court orders addressed to a plan.
| Exception | 401(k) or 403(b) | IRA | Cap | IRC section |
|---|---|---|---|---|
| Health insurance premiums while unemployed | no | yes | none | 72(t)(2)(D) |
| Qualified higher education expenses | no | yes | none | 72(t)(2)(E) |
| First-time homebuyer, up to $10,000 | no | yes | $10,000 | 72(t)(2)(F) |
| Left the employer in or after the year you turned 55 (50, or 25 years of service, for qualified public safety employees) | yes | no | none | 72(t)(2)(A)(v), 72(t)(10) |
| Paid to an ex-spouse under a QDRO | yes | no | none | 72(t)(2)(C) |
The three IRA-only exceptions, with their limits
The first-time homebuyer exception covers up to $10,000. On a $25,000 withdrawal at 38, single, with $65,000 of salary, the exception removes the 10 % from $10,000 and leaves it on the other $15,000: $1,500 of additional tax, plus about $5,350 of federal income tax on the whole amount because it lands on top of the salary. A smaller withdrawal sized to the cap avoids the penalty entirely, but income tax remains.
The education exception covers qualified higher education expenses, with no dollar cap in the IRS table. A 44-year-old paying $15,000 of tuition from an IRA owes no additional tax, but the $15,000 still counts as income: about $3,300 of federal tax on an $80,000 salary. The third exception, unemployed health insurance, is narrow by design. The IRS table describes it as distributions equal to the amount paid for family health insurance by someone who was unemployed for 12 weeks and received unemployment compensation in the year of the distribution or the year after. Someone who quits to retire early and never draws unemployment does not meet it.
A first home: how much of the withdrawal the exception covers
You keep
$18,150
| 10 % additional tax | $1,500 |
| Federal income tax | $5,350 |
| State income tax | $0 |
| Withheld at payout | $0 |
No rule of 55 in an IRA
This is the costly one for early retirees. The separation-from-service exception, age 55 or 50 for public safety, is marked "no" in the IRA column. Someone who leaves a job at 55 and rolls the 401(k) into an IRA the same month turns a penalty-free account into a penalized one. Take $18,000 at 56 with no other income: from the IRA, $1,800 of additional tax; left in the plan of the employer just left, $0. Federal income tax is the same either way, $190, because the standard deduction absorbs most of it. The rule of 55 page explains the calendar-year test.
An IRA does offer the main early-retirement tool that works at any age: a series of substantially equal periodic payments under section 72(t), with no need to have left an employer. The 72(t) calculator computes it.
The SIMPLE IRA two-year rule
A footnote in the IRS table sets a higher rate for one case: distributions from a SIMPLE IRA within the first two years of participation incur a 25 % additional tax instead of 10 %. On $12,000, that is $3,000 instead of $1,200. The two years run from your first participation in the employer's SIMPLE IRA plan, so someone who joined a small employer recently and quits early to retire should check the date before touching that account. After the two years, the ordinary 10 % applies, with the same exceptions as any IRA.
Withholding: the 20 % rule belongs to employer plans
The mandatory 20 % withholding described in Publication 575 applies to eligible rollover distributions paid by an employer plan (IRS Publication 575). An IRA payout is outside that rule; what the custodian holds back depends on the election you make on its withdrawal form. Whatever is or is not withheld, the income tax and the 10 % are settled on your return, with Form 5329 for the additional tax or for an exception that box 7 of the Form 1099-R does not show.
Roth IRAs follow a different order
A Roth IRA is an IRA for the 10 %, but the order of withdrawals changes everything: your own contributions come out first, free of tax and of the additional tax at any age, and only earnings can be penalized. Conversions have their own five-year clock. The Roth IRA withdrawal page works through the ordering rules (Publication 590-B).
Exceptions shared with plans
Disability, a birth or adoption, unreimbursed medical expenses above the 7.5 % of adjusted gross income floor, an emergency personal expense, domestic abuse, a federally declared disaster, an IRS levy and a reservist called to active duty all work for IRAs as well, each with the cap shown on the full exceptions page. The 401(k) penalty page covers the plan side.