Ways to Avoid the Penalty on Early Retirement Withdrawals
Sometimes you just can’t avoid dipping into a retirement fund, but you might be able to qualify for an exception to the 10% tax penalty.


Pulling money from your pre-tax retirement accounts before age 59½ should be done only as a last resort, since it can end up triggering both a 10% penalty as well as ordinary income tax. A far better solution is to use money from non-retirement accounts, such as joint accounts, single accounts or most trust accounts, where there will be no penalty on early retirement withdrawal and often little or far less tax.
But the reality is, sometimes people have nowhere else to go other than their pre-tax retirement plan to access needed cash. In such a situation, the income tax cannot be avoided, but the 10% early withdrawal penalty sometimes can be.
The most important thing to do to avoid paying an unnecessary penalty is to become familiar with what exception applies to what retirement plan. Many people who end up paying the penalty do so because the exception they used did not apply to the retirement account they took the money from. The good news is that most of the 10% penalty exceptions apply to both company plans, as well as IRAs, but as you’ll see, there are some very valuable exceptions that apply only to one or the other.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A simple way to remember which penalty exception applies to which type of retirement plan is to think of three categories of early-withdrawal exceptions:
1. 10% Penalty Exceptions That Apply to “Both” Company Retirement Plans and IRAs.
This includes distributions to your beneficiaries after your death, disability, unreimbursed medical expenses above 7.5% of your adjusted gross income (you don’t have to itemize to use this exception), Roth IRA conversions and up to $5,000 for the birth or adoption of a child.
There are also some new exceptions that came into law with the passage of the SECURE Act 2.0 of 2022. Under this new law, you can tap your retirement accounts if you’re dealing with domestic abuse, coping with a natural disaster or if you’re diagnosed with a terminal illness, Also, starting in 2024, there will be a new emergency personal expense exception of up to $1,000.
And finally, if you need to take income on your retirement account before 59½, if you agree to set up a regular income known as Substantially Equal Periodic Payments for at least five years or until you reach age 59½, whichever comes later, such income can be taken without a 10% penalty.
2. Exceptions That Apply “Only” to IRAs.
This includes higher education expenses for yourself or your dependents, up to $10,000 toward a home for a first-time home buyer and to pay for health insurance if you are unemployed.
3. Exceptions That Apply “Only” to Company Retirement Plans.
There are two big ones here.
The first is the attainment-of-age-55 exception. Distributions made to you if you leave your company during or after the calendar year in which you reached age 55 (or age 50 for qualified public safety employees) will avoid the 10% penalty. The other is the Qualified Domestic Relations Order (QDRO), which means withdrawals made to the other spouse as part of a divorce will avoid the 10% penalty.
While the best approach if you need to get your hands on some cash is to use only a pre-tax retirement account as a last resort, if this can’t be avoided, remember that old saying “what you don’t know can hurt you.” You not only should know what the exceptions are, but you should become familiar with what exception applies to what retirement plan. This may save you what can sometimes be in the thousands or tens of thousands of dollars in unnecessary penalties.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Berkshire Hathaway's in the 100,000% Return Club. No Surprise Here
Warren Buffett's fascination with the insurance industry has helped Berkshire Hathaway's stock return snowball.
By Louis Navellier Published
-
4 Turnaround Stocks to Consider – and 2 More to Keep an Eye On
A turnaround stock is a struggling company with a strong makeover plan that can pay off for intrepid investors.
By Nellie S. Huang Published
-
Facing a Layoff? Ask Your Employer These Questions Now
If you're being laid off or forced into early retirement, don't make any decisions without proper guidance — and that starts by asking some key questions.
By Ben Maxwell, ChFC®, AAMS® Published
-
Have $1M+ Saved? Consider a Financial Planning One-Stop Shop
A 'one-stop shop' team — including a financial planner, estate planning lawyer, CPA and more — could serve all of your tax, estate and retirement planning needs.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Five Ways to Safeguard Your Portfolio in Market Downturns
The stock market is nothing if not volatile these days. When it takes a dip, a well-managed, properly diversified portfolio could help you ride out the storm.
By Joel V. Russo, LUTCF Published
-
This Underused IRA Option Offers Tax Benefits and Income Security
Looking to avoid running out of money in retirement? Consider longevity protection provided by a QLAC as a component of your retirement income plan.
By Jerry Golden, Investment Adviser Representative Published
-
These Four Books Explore How to Leverage Our Outrage Positively
The authors offer some powerful tools to help us find solutions to discord rather than remaining silent or blowing up in anger.
By H. Dennis Beaver, Esq. Published
-
Financial Pitfalls to Avoid in Your 30s, 40s and 50s
As you pass through each decade of working life and build wealth for retirement, watch out for the financial traps that can hinder your progress.
By Julia Pham, CFP®, AIF®, CDFA® Published
-
Five Key Retirement Challenges (and How to Face Them Head On)
Life will inevitably throw challenges at you as you get older. But making a flexible retirement plan — and monitoring it regularly — can help you overcome them.
By Walt West Published
-
Four Action Items for Federal Employees With $2M+ Saved
If you can't stand the chaos, maybe you can walk off into the sunset of retirement. Here are some thoughts on how to figure out if that would work for you.
By Evan T. Beach, CFP®, AWMA® Published