Planning on Making Early Withdrawals from Your IRA or 401(k)? Include These Tips in Your Plan.
Published on March 17, 2025
Even the best savers may find themselves in a situation where they need to tap their retirement account before reaching age 59½, the minimum age at which an individual can take distributions without triggering (and paying) a 10% early withdrawal penalty. This rule is to encourage taxpayers to continue saving as much as they can while still working.
If you need to take an early distribution from your IRA or your employer’s 401(k) plan, you need to know the IRS rules about these “premature distributions.”
Exceptions to the early withdrawal penalty
There are certain exceptions for which an account owner can start withdrawing funds penalty free before age 59½; however, the distribution will count as taxable income, reported by the retirement plan on Form 1099-R. Taxpayers should report the distribution using Form 5329 and report the amount of the penalty or claim an exception.
Exceptions to the 10% penalty for Traditional IRAs are for using the distribution:
• To purchase a first home (up to $10,000 withdrawal allowed).
• To roll it over or transfer it to another IRA or qualified retirement plan.
• For unreimbursed medical expenses.
• For qualified education expenses.
• In cases of the account owner’s death or disability.
• For certain personal or family emergency expenses (one distribution per calendar year, up to the lesser of $1,000 or vested account balance over $1,000). These emergency distributions can be repaid within a three-year period. Failure to do so prohibits the taxpayer from taking another $1,000 distribution during the following three-year period.
• Disaster recovery (up to $22,000 to qualified individuals who sustain an economic loss due to a federally declared disaster where they live; the IRS often allows taxpayers to repay these distributions).
• For qualified expenses related to a birth or adoption (up to $5,000); the distribution can be repaid within a three-year period.
• For a survivor of domestic abuse by a spouse or domestic partner for distributions made after 12/31/2023 (up to the lesser of $10,000 or 50% of account).
• To satisfy a series of substantially equal periodic payments.
• When made due to an IRS levy.
Roth IRA rules
If the account is a Roth IRA, it must also have been open at least five years before making the withdrawal to avoid the earnings being subject to taxes and penalties.
Regarding the list above, some but not all these exceptions apply to early Roth IRA withdrawals. For a Roth IRA, the most common exceptions are:
• A first-time home purchase
• A birth or adoption expense
• A qualified education expense
• Death, disability or terminal illness
• Health insurance payment (if you are unemployed)
• Some medical expenses
NOTE: This list also applies to early withdrawals from a SIMPLE IRA or SEP IRA. If you participate in a 401(k), check with your plan administrator about any other exceptions, such as separation from service after reaching age 55 or hardship distributions.
Contact Next Generation with your questions
As you see, taking a distribution before you reach the minimum distribution age can get complicated when it comes to avoiding that 10% penalty—and remember, the distributions are usually taxable income, so you need to plan for that.
If you have questions about exceptions to the early-withdrawal penalty, we recommend you consult your trusted advisor or, if your self-directed IRA is with Next Generation Trust Company, contact our office for clarification.
FYI – sources
https://www.thinkadvisor.com/2025/01/08/early-ira-and-401k-withdrawals-what-to-know/?kw=Early%20IRA%20and%20401%28k%29%20Withdrawals%3A%20What%20to%20Know&utm_position=6&utm_source=email&utm_medium=enl&utm_campaign=financialplanninginsider&utm_content=20250115&utm_term=tadv&oly_enc_id=4679F3155245C9X&user_id=772b26dbff0a4792038a289127c8060c3ce7fe8d0a2abbeada08f80fad878907
https://www.schwab.com/ira/roth-ira/withdrawal-rules
https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
https://www.fidelity.com/retirement-ira/ira-early-withdrawal#roth-ira
