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What Are the Penalties for Withdrawing Early From an IRA?

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What we’ll cover:

  • Just as there are rules for contributions, IRAs also have rules when it comes to taking money out of your account.
  • Traditional and Roth IRAs come with different withdrawal rules
  • Early withdrawals usually trigger income taxes and a 10% penalty, unless you qualify for an exception. 

In a perfect world, the money you put into an IRA would stay invested in the account until you’re ready to use it in retirement. But as you know, life is full of surprises. You might find yourself in a situation where you need to make an early withdrawal. 

Before you dip into your retirement funds, you’ll want to read the fine print. Just as there are rules for contributions, IRAs also have rules when it comes to taking money out of the account. 

Understanding how the withdrawal rules work is important because taking money out too soon could trigger a 10% early withdrawal penalty (and maybe even taxes). However, there are certain situations where you might be able to withdraw your funds penalty-free. “Qualified distributions” is the fancy IRS-speak for such exceptions. 

Let’s take a closer look at some of the key withdrawal rules. We’ll also provide examples of situations where you might be able to take money out of your IRA penalty-free.

Traditional and Roth IRAs come with different withdrawal rules

You probably already know that traditional and Roth IRAs operate a little differently. (Need a quick refresher? Check out our article on the topic here.) 

When it comes to early withdrawal penalties, the rules vary and depend largely on your age and account type. 

Generally speaking, taking money out of your IRAs before the age of 59 ½ is considered an “early distribution,” which could be subject to a penalty (typically 10% of the withdrawal amount).

If you’re age 59 ½ and over…

Traditional IRA. Age is nothing but a number. And one key number you’ll want to remember is 59 ½. Once you hit this age, you could begin to withdraw funds from your IRA without having to pay a 10% early withdrawal penalty. 

This is important: While the withdrawal might be penalty-free, it might not be tax-free. If you contributed to your traditional IRA with pre-tax dollars, you’ll typically have to pay taxes when the money comes out.

Don’t need the money at 59 ½? You don’t have to withdraw it!

Remember, with traditional IRAs, you can wait until you’re 72 to start taking Required Minimum Distributions. Until then, if you’re good on funds, you can keep the money parked in the account to stay invested, giving it more time to potentially grow. 

Roth IRA. Keep in mind that you can withdraw your contributions from your Roth account at any time, penalty-free and tax-free. Withdrawing earnings, however, is a different story. 

You may be wondering why we’re making a distinction between contributions and earnings. Seems like we’re just splitting hairs, right? Well, when you withdraw from your Roth account, money comes out in a certain order: 

1. Regular contributions are money you’ve put into your account. You can withdraw contributions at any time without having to worry about taxes or penalties because you’ve already paid taxes on that money. (Remember, contributions to Roth accounts are made with after-tax dollars.)

2. Conversion contributions or money you brought over from another account (like a traditional IRA).

3. Earnings are the profits from your investments.

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To make a penalty-free, tax-free withdrawal of your earnings from a Roth account, you have to have the account for at least 5 years (from when you made your first contribution). This waiting period is often referred to as the “5-year rule.” 

And if you haven’t met the 5-year rule? Generally, you will have to pay taxes on the earnings you withdraw. However, you won’t be subject to the 10% early withdrawal penalty because you’ve reached the age of 59 ½. 

This chart can help you keep the details straight:

You’re 59 ½ (or older). Have you met the 5-year rule?

Will there be taxes or penalties on the withdrawal?

Yes

The withdrawal is generally tax-free and penalty-free.

No

The withdrawal of your earnings is generally taxable but there’s no penalty.

Oof – we just gave you a lot of information to process. Still with us? You’re doing great. Let’s look at the rules if you’re under 59 ½. 

If you’re under the age of 59 ½…

Want to take money out of your account but haven’t cleared 59 ½? As we mentioned earlier, withdrawing funds before this age is considered an early distribution. 

Traditional IRA. Generally, you will have to pay a 10% penalty for early distributions, as well as income taxes on the money you take out. 

Are there situations where you could withdraw from your traditional IRA penalty-free? 

IRAs are designed to help you save for retirement. Consider the rules as a way of discouraging you from taking the money out too soon.

Yes! The IRS provides exceptions to the early distribution rule. For example, you may not have to pay the 10% penalty if…

  • You have unreimbursed medical expenses that are more than 7.5% (10% for years beginning after December 31, 2019) of your adjusted gross income. 
  • The distributions aren't more than the cost of your medical insurance due to a period of unemployment.
  • You are totally and permanently disabled.
  • You are the beneficiary of a deceased IRA owner.
  • The distributions aren't more than your qualified higher education expenses.
  • You use the distributions to buy, build, or rebuild a first home.

Visit the IRS webpage on IRA distributions for the full list of exceptions. 

Good to know: Because of the SECURE (or Setting Every Community Up for Retirement Enhancement) Act, you can now withdraw up to $5,000 from an IRA to pay for qualified adoption or birth-related expenses without having to pay the 10% early withdrawal penalty (though you’ll still be subject to income taxes). The law also allows you to repay these amounts into the IRA. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act also made some temporary changes to IRA withdrawal rules. To learn more about coronavirus-related distributions, check out this article.

Roth IRA. Because many people often miss this fine detail, it’s worth mentioning again: You can withdraw your contributions anytime from your Roth account tax-free and penalty-free. 

But if you take an early distribution from your account earnings, the distribution may be subject to taxes and a 10% penalty. 

Unless it’s a qualified distribution. The IRS does not tax or penalize qualified distributions from your Roth account. 

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To be considered a qualified distribution, your withdrawal has to meet the following requirements:

  1. Your Roth account has satisfied the 5-year rule. In other words, you’ve had the account for at least 5 years since you made your first contribution. 
  2. The distribution is: 
    • Made on or after the date you reach age 59½
    • Made because you are disabled 
    • Made to a beneficiary or to your estate after your death, or
    • Used for a qualified first-time home purchase (up to a $10,000 lifetime limit)

For non-qualified distributions, you usually have to pay taxes and a 10% withdrawal penalty on the money you take out. But again, there are exceptions. You may not have to pay the penalty in the following situations: 

  • You have reached age 59 ½. 
  • You are totally and permanently disabled.
  • You are the beneficiary of a deceased IRA owner.
  • You use the distribution to buy, build, or rebuild a first home.
  • You have unreimbursed medical expenses that are more than 7.5% (10% for years beginning after December 31, 2019) of your adjusted gross income for the year.
  • You are paying medical insurance premiums during a period of unemployment.
  • The distributions aren't more than your qualified higher education expenses.

You can visit this IRS webpage for additional examples.

Everyone’s financial and tax situation is different, so it’s a good idea to consult the IRS or a professional tax advisor if you have any questions.

The IRS also has a flowchart that walks you through some questions to help you determine if your Roth IRA distribution is a qualified distribution.

Parting thoughts

As you can probably tell, rules on withdrawing from your IRA can get complicated. Early withdrawals usually trigger income taxes and a 10% penalty, unless you qualify for an exception. 

What’s the big idea behind all these early withdrawal rules, anyway? 

IRAs are designed to help you save for retirement. Consider the rules as a way of discouraging you from taking the money out too soon. But hey, life happens. We get it. If you decide to take an early withdrawal, bear in mind that what we’ve covered here are just the basics. 

The IRS has an entire publication dedicated to IRA distributions (see Publication 590-B)! It’s not exactly a leisurely read, so it's a good idea to consult the IRS or a professional tax advisor if you have any questions. Because everyone’s financial and tax situation is different, it’s important to make sure that you understand what specific rules may apply to you. 

This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.