What is Early Withdrawal Penalty?

The early withdrawal penalty is a 10% tax on money you take out of retirement accounts before age 59½. Some exceptions apply. This penalty is designed to deter individuals from using retirement assets for pre-retirement consumption. The 10% penalty is assessed in addition to any ordinary income tax due on the distributed amount.

There are several statutory exceptions to the 10% penalty. Traditional exemptions include distributions for qualified higher education expenses, first-time home purchases (up to $10,000 lifetime), disability, and series of substantially equal periodic payments (SEPP under Rule 72t). Additionally, the SECURE 2.0 Act introduced new exceptions, such as emergency personal expenses (up to $1,000 once a year), domestic abuse survivor distributions (up to $10,000 or 50% of the account), and terminal illness distributions.

To claim an exception to the early withdrawal penalty, taxpayers must file Form 5329 alongside their federal income tax return. Although an exception may eliminate the 10% penalty, the distribution remains subject to ordinary income tax unless it is a qualified distribution from a Roth account.