10% Early Withdrawal Penalty & Exceptions
Distributions before 59 1/2 cost 10% extra, unless an exception applies.
What is 10% Early Withdrawal Penalty & Exceptions?
On top of ordinary income tax. Common exceptions: death, disability, substantially equal periodic payments (Rule 72(t)), unreimbursed medical expenses above 7.5% of AGI, and a birth or adoption (up to $5,000). IRA-only exceptions include up to $10,000 for a first-time home purchase and qualified higher education expenses. Employer-plan-only: separation from service in or after the year the employee turns 55.
10% Early Withdrawal Penalty & Exceptions: a worked example
A 56-year-old who leaves their job can take 401(k) withdrawals penalty-free, but the same money rolled to an IRA would face the penalty until 59 1/2.
More terms in Retirement Plans, Accounts & Trading
IRA Rollovers vs. Transfers
60-day rollovers are limited to one a year; direct transfers are unlimited.
Solo 401(k)
A 401(k) for a self-employed owner with no employees other than a spouse.
Defined Benefit Plan
A pension promising a specific benefit; the employer bears the investment risk.
Defined Contribution Plan
An individual account plan whose payout depends on contributions and returns.
403(b) Plan
A salary-deferral plan for public schools and 501(c)(3) nonprofits.
457 Plan
Deferred compensation for state and local government employees.
SIMPLE IRA
A low-cost plan for employers with 100 or fewer employees.
SEP IRA
An employer-funded IRA plan, up to 25% of compensation.
All Retirement Plans, Accounts & Trading terms · Full glossary