Penalty for Early Withdrawal From a Retirement Account

Several different retirement plans offer tax advantages to encourage you to save. For example, contributions to a 401(k), 403(b) or IRA are tax deductible and the earnings on a Roth IRA can be withdrawn tax free at retirement. In all the plans, the funds are allowed to grow tax free until they are withdrawn. However, to ensure that these accounts are used for retirement savings, the government imposes penalties on early withdrawals.

Penalties

According to the Internal Revenue Service, retirement is defined as beginning at age 59 1/2. If you withdraw money from a retirement account before you reach retirement age, it will be subjected to a 10 percent penalty in addition to any income or other taxes.

Types

The penalties apply only to certain retirement accounts because of the tax benefits associated with them. The plans that can be affected by the 10 percent penalty for early withdrawals are 401(k) plans, 403(b) plans, 403(a) plans, 457 deferred-compensation plans, Roth IRAs and traditional IRAs.

Exemptions

Contributions can be withdrawn from your retirement account without being subject to the 10 percent penalty for several reasons. If you die or become permanently disabled, withdrawals from your retirement accounts will not be penalized. If you are subject to an IRS levy, the money may be withdrawn penalty free. Also, if your medical expenses exceed 7.5 percent of your adjusted gross income, you may withdraw money to pay for the amount that exceeds the 7.5 percent threshold.

Exceptions for Non-IRA Accounts

There are several special early withdrawals that are available to qualified retirement accounts not including tradition IRAs or Roth IRAs. If you you leave your employer after age 55, you may start receiving payouts immediately rather than waiting until age 59 1/2. If you worked a a public safety employee, the age is 50 rather than 55. Also exempt from the 10 percent tax are payouts that go to another individual due to a qualified domestic-relations orders, such as alimony or child support, and payouts of dividends from workers' stock ownership plans.

Exceptions for IRAs

The Roth IRA and traditional IRA also offer a few situations in which money can be withdrawn without penalty. First-time home buyers can withdraw up to $10,000 per person (or $20,000 for a married couple) to help cover the costs of buying a home. You also may take out money penalty free to pay for qualified higher education costs, such as tuition, or for medical insurance premiums while you're unemployed.

References

About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."