Can You Make An Early Retirement Withdrawal?

We put money into retirement accounts and watch the balance grow looking forward to the day when we have enough funds to permanently retire. Sometimes a situation arises that may necessitate an early retirement withdrawal. It can be done, but there are rules and exception that apply.

Early Retirement Withdrawal Penalty

You must be 59 ½ years old to take money out of your retirement nest egg penalty free. If you do so early, the IRS will slap you with a 10% early distribution tax on top of any income tax owed. This tax is imposed to encourage people to keep their hands off retirement funds until retirement age is reached.


There are some exceptions in which the 10% tax can be avoided. Some of them are listed below.

  • Retiring Early: If you decide to retire early (before the age of 59 ½), you can set up substantially equal periodic payments that are designed to be spread over the remainder of your life. Once you reach the age of 55 you will not have to pay the 10% tax on any distribution of your retirement accounts. Both of these scenarios require that you have left your employer before any distribution occurs.
  • Medical Expenses: Money can be taken from retirement accounts to pay for large medical bills. However, this exception only applies to medical expenses that are deductible from your taxes. In other words, the portion of medical expenses that exceed 7.5% of your income.
  • Disability: If you become permanently disabled, future distributions from retirement accounts will not incur the early retirement withdrawal fee.

Traditional IRAs

The rules for an early retirement withdrawal are a little different for traditional IRAs:

  • No Early Retirement: There is no age exception to avoid the early withdrawal penalty with traditional IRAs.
  • Health Insurance: Unemployed persons can use IRA funds for health insurance premiums as long as unemployment benefits have been received for 12 consecutive weeks, and the funds are received in the year you’ve received unemployment payments or the following year.
  • College Expenses: IRA funds can be used to pay for college expenses for the IRA owner, their spouse, child or grandchild. The funds received cannot exceed the amount of college expenses incurred.
  • First Home: A maximum $10,000 penalty free IRA distribution can be used to purchase a home as long as you are a first time home buyer, and the distribution is used within 120 days of receiving it.

Loan Alternative

If you absolutely need cash but don’t want to pay the hefty 10% early distribution tax, many plans offer the ability to take out a loan, to be paid back within a certain period of time. Do this cautiously, as it will reduce the balance of your retirement account and thus slow the growth of your investments. If the loan goes into default, it is then considered income and subject to the 10% early distribution tax and income taxes.

Accessing retirement funds early isn’t ideal, but it may be the best or only choice in some scenarios. Knowing the rules, exceptions and potential fees arms you with the information needed to make the right choice.

How about you, Clever Friends, have you ever accessed your retirement funds early? What did you use the funds for?

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