Tapping Retirement Money Early: Penalty and Exceptions
The 10 percent penalty on withdrawals before 59½, the exceptions that apply to IRAs, to 401(k)s, or to both, and the substantially equal payment plan business owners use.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Withdrawals from a traditional IRA or 401(k) before age 59½ are taxed as income plus a 10 percent additional tax unless an exception applies. Some exceptions work only for IRAs, some only for employer plans, some for both. Owners who need steady access use substantially equal periodic payments, penalty-free if continued for five years or until 59½, whichever is later.
On this page
Which exceptions apply to which accounts?
| Exception | IRA | 401(k) and other employer plans |
|---|---|---|
| Separation from service in or after the year you turn 55 (50 for qualified public safety employees) | No | Yes |
| Substantially equal periodic payments | Yes | Yes (after leaving the employer) |
| Total and permanent disability | Yes | Yes |
| Medical expenses above 7.5 percent of adjusted gross income | Yes | Yes |
| Birth or adoption, up to $5,000 per child | Yes | Yes |
| Personal emergency, up to $1,000 (one per calendar year, repayable within three years) | Yes | Yes |
| Domestic abuse victim, up to the lesser of $10,500 (2026; $10,300 in 2025) or half the account | Yes | Yes |
| Terminal illness | Yes | Yes |
| Federally declared disaster, up to $22,000 per disaster | Yes | Yes |
| First home purchase, up to $10,000 lifetime | Yes | No |
| Higher education expenses | Yes | No |
| Health insurance premiums while unemployed | Yes | No |
| IRS levy on the account | Yes | Yes |
| Qualified reservist distributions | Yes | Yes |
The exceptions remove the 10 percent penalty, not the income tax.
How do substantially equal periodic payments work?
Under Section 72(t), you commit to a schedule of annual withdrawals calculated by one of three IRS-approved methods in Notice 2022-6 (required minimum distribution, fixed amortization, or fixed annuitization) and keep taking them for at least five years and until age 59½. Modifying the schedule early — taking more, less, or stopping — triggers the penalty retroactively on every payment, with interest. The one change allowed is a one-time switch from a fixed method to the required minimum distribution method. Owners often split an IRA so the schedule runs on one account while the rest stays untouched.
What about a 401(k) loan?
A plan loan is not a withdrawal: up to the lesser of $50,000 or half the vested balance, repaid with interest over five years (longer for a home purchase). Leaving the employer with a balance outstanding generally triggers a loan offset — a taxable distribution unless you roll that amount over to an IRA or another plan by your return due date, including extensions. Solo 401(k) plans can allow loans; IRAs cannot.
Can Roth money be taken early?
Roth IRA contributions (not earnings or conversions within five years) can be withdrawn at any time without tax or penalty. Earnings are tax-free only after five years and 59½ or another qualifying reason.
Frequently asked questions
Does the age-55 rule apply to an IRA I rolled my 401(k) into?
No. Rolling the plan into an IRA forfeits the age-55 exception; leave the money in the plan if you may need it before 59½.
Are state taxes also due?
Many states tax the withdrawal as income; a few add their own penalty. Florida has no income tax.
Can a business owner use the emergency exception every year?
No. Only one is allowed per calendar year, and after taking one you cannot take another from that plan or IRA during the next three calendar years unless you have repaid it or made new contributions at least equal to it.
Is a hardship withdrawal penalty-free?
No. A hardship withdrawal from a 401(k) is permitted by the plan but still subject to the 10 percent penalty unless another exception applies.
Official sources
The IRS explains: “Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called "early" or "premature" distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.” — Internal Revenue Service, Retirement topics - Exceptions to tax on early distributions, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
The IRS explains: “The taxpayer may change the chosen method in accordance with Notice 2022-6, only under one set of conditions. The only permitted change in method is if the taxpayer changes from one of the fixed methods under Q&A 3 (either the fixed amortization method or the fixed annuitization method) to the RMD method.” — Internal Revenue Service, Substantially equal periodic payments, https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk calculates the periodic payment schedule and documents the exception before the first withdrawal. See pricing or book a free fit call.
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