Early Withdrawal Penalty

The tax code calls it the 10% additional tax on early distributions. If you take money from a qualified retirement plan before the date you reach 59½, your federal tax for that year rises by 10% of the part of the withdrawal included in your gross income. From the day you reach 59½, age alone is an exception and the charge stops.

Because the charge follows taxable income, some money is never hit. Your own contributions to a Roth IRA and amounts rolled over to another plan or IRA within 60 days aren’t included in income, so the 10% doesn’t apply to them. If you made nondeductible traditional IRA contributions, part of each withdrawal returns that basis tax-free under the pro-rata rule and escapes the 10% as well. A Roth conversion is also exempt when it happens, although converted money can be charged if you withdraw it within five years.

You report the charge on Schedule 2 of Form 1040. If box 7 of every Form 1099-R shows code 1 and you owe the tax on the full amount, it goes straight on Schedule 2, line 8; otherwise you file Form 5329, which is also where you claim an exception the payer didn’t code.

The 10% is only one layer. The same dollars are ordinary income, taxed at your marginal rate, and states with an income tax generally tax them too. California goes further, adding its own 2½% tax on early distributions (6% on a SIMPLE IRA in its first two years) and not following every federal exception.

Stacked up, a saver in the 22% federal bracket loses about a third of a pre-tax withdrawal before state tax. Working backward is worse: to end up with $30,000 to spend at a combined 32% federal cost, you would need to withdraw about $44,118, and the larger withdrawal can push part of it into a higher bracket.

The longer-run cost is the growth given up. Money taken out at 45 stops compounding inside a tax-deferred account for the next 15 or 20 years, and once the 60-day rollover window passes, it can usually be replaced only by new contributions within the normal yearly contribution limits.

The IRS lists more than 20 exceptions, and the type of account matters as much as the reason: some apply only to workplace plans, some only to IRAs, and several newer ones from SECURE 2.0 cap the amount or, like the terminal-illness exception, need a physician’s certification. An exception usually covers only the qualifying amount, so a larger withdrawal can be partly penalized, and income tax still applies in every case. The main exceptions, with 2026 amounts:

If you are planning an early retirement rather than reacting to an emergency, several routes avoid the 10% entirely. They differ in flexibility, lead time and which accounts they reach.

Your own Roth IRA contributions can come out at any time, tax- and penalty-free, because Roth withdrawals are treated as coming from contributions first. A Roth conversion ladder adds converted money to that pool after five years. A 72(t) series draws fixed payments from an IRA at any age, but locks them in until the later of five years or 59½. The rule of 55 opens a workplace plan if you leave that employer in or after the year you turn 55. A governmental 457(b) plan carries no 10% tax at all, apart from money rolled in from other plans or IRAs. And a taxable brokerage account has no age rules, only tax on gains and income.

Many early retirees combine two or three of these.

The penalty often arrives as a surprise at filing time rather than when the money moves, because payers withhold for income tax, code forms conservatively, and don’t know which exceptions you meet. Most slips come from treating every account and every exception as interchangeable, when the rules differ by account type. Once a distribution is paid, most can be fixed only through the 60-day rollover window, so check before you withdraw: