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Banking 101: What Are IRA, 401(k) and 403(b) Early Withdrawal Penalties?


Written by Janet Berry-Johnson | Published on January 31, 2020

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

Early withdrawal penalties can be a major drain on your individual retirement account (IRA), 401(k) or other tax-advantaged retirement funds. However, there are times when an emergency or difficult life circumstances makes it necessary to withdraw money from your retirement accounts. Early withdrawal penalties vary depending on the account type, your age and your circumstances. Read on to see how much you might be on the hook for when making an early withdrawal.

In this article we will cover:

Traditional IRA early withdrawal penalties

If you withdraw money from your traditional individual retirement account (IRA) prior to age 59½, the IRS charges a 10% early withdrawal penalty. This penalty is in addition to any regular income tax you owe on the distribution. Note that the rules are different if you have a Roth IRA (more on that later).

Traditional IRA early withdrawal exceptions

There are exceptions to the rules for early withdrawals from a traditional IRA. Those exceptions include withdrawals taken:

  • After the death of the account holder
  • Due to the total and permanent disability of the account holder
  • To pay for qualified higher education expenses
  • As a series of sequentially equal periodic payments
  • To purchase your first home — but only up to $10,000
  • Because of an IRS levy of the plan
  • To pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
  • To pay health insurance expenses while you’re unemployed
  • By qualified military reservists called to active duty
  • For a rollover into another eligible retirement plan or IRA (within 60 days)

Given the 10% early withdrawal penalty on traditional IRAs, taking out money can be an expensive proposition. If you don’t have any other savings available, check to see if you qualify for one of these exceptions.

What are Roth IRA early withdrawal penalties?

Contributions to a Roth IRA aren’t tax-deductible — but since they are made after you pay income tax, distributions are tax free. That gives you a little more flexibility when it comes to taking early withdrawals from a Roth IRA.

If you’re under the age of 59½, you can withdraw contributions made to your Roth IRA at any time, free of any taxes or withdrawal penalties. You may have to pay taxes and a 10% early withdrawal penalty if you withdraw earnings from your Roth IRA, depending on how long you’ve had the account.

Roth IRA early withdrawal exceptions

If you’re under the age of 59½ and you’ve owned a Roth IRA account for less than five years, you can avoid paying an early withdrawal penalty on earnings if:

  • You withdraw up to $10,000 to pay for your first home
  • The money is used to pay for qualified higher education expenses
  • You become disabled or pass away
  • The money is used to pay for unreimbursed medical expenses or health insurance premiums while unemployed
  • The distribution is made as a series of substantially equal periodic payments

Note that you may still have to pay income taxes on withdrawn earnings if you’re under the age of 59½ and you’ve owned a Roth IRA account for less than five years, even if you qualify for any of the exceptions above and avoid paying an early withdrawal penalty. The taxes owed would depend on your overall income for the year.

If you’re under the age of 59½ and you’ve had the Roth IRA account for five years or more, you avoid paying penalties and income taxes on the withdrawn earnings if you qualify for one of the exceptions listed above.

Over the age of 59½, there are no penalties at all on any Roth IRA withdrawals. However, you may still have to pay income taxes on withdrawals of earnings if you’ve owned the Roth IRA for less than five years.

What are 401(k) early withdrawal penalties?

If you have an employer-sponsored 401(k) plan at work, tapping the balance may seem like an easy way to solve a short-term cash crunch. However, you’ll be charged a 10% early withdrawal penalty on the amount withdrawn if you’re under the age of 59½, plus any applicable income taxes, depending on your overall income for the year.

401(k) early withdrawal exceptions

There are a few exceptions to the 401(k) early withdrawal penalty. You can avoid the penalty in the following circumstances:

  • You take a corrective distribution of excess contributions
  • After the death of the plan’s owner
  • Due to permanent and total disability of the plan’s owner
  • The distribution was paid to an alternate payee under a Qualified Domestic Relations Order (i.e., required under the terms of a divorce)
  • The distribution was taken as part of a series of substantially equal periodic payments
  • The distribution was a dividend passed through from an Employee Stock Ownership Plan
  • Because of an IRS levy of the plan
  • To pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
  • The distribution was made to a qualified military reservist called to active duty
  • As part of a rollover into another retirement plan or IRA within 60 days
  • You retired during or after the year the employee reaches age 55 (age 50 for public safety employees)

401(k) loans and early withdrawal fees

If you don’t qualify for one of the exceptions above, you may also consider taking a loan from your 401(k) instead of a withdrawal. While not all 401(k) plans permit loans, some do. Most allow you to repay your loan via regular deductions from your paycheck. What’s more, the interest you’ll pay on a 401(k) loan doesn’t go to your employer or the financial institution holding your funds, but into your own retirement account.

However, before you take out a 401(k) loan, remember there are some downsides to borrowing from your retirement savings. The money you withdraw won’t grow while it isn’t invested, and you may have to pay a hefty fee to arrange the loan. Plus, if you leave your job while you have an outstanding loan balance, you have a limited window of time to repay your loan. If you miss that window, the outstanding loan balance is treated like an early distribution, subject to taxes and an early withdrawal penalty.

You have until the due date for filing your return for the year you leave your job (including extensions) to either pay off the outstanding loan balance or roll the loan into an IRA to avoid having the loan treated as a distribution.

What are 403(b) early withdrawal penalties?

A 403(b) plan is similar to a 401(k), but for employees of public schools and certain nonprofit organizations. The consequences of taking an early 403(b) withdrawal are the same as those for a 401(k): You’ll pay income taxes on the amount withdrawn, plus an additional 10% penalty.

403(b) early withdrawal exceptions

The penalty exceptions for a 403(b) early withdrawal are also the same as those for a 401(k). If you’re thinking of taking a withdrawal before the age of 59½, consider whether you qualify for one of the early withdrawal exceptions noted above.

IRA Roth IRA 401(k) 403(b)
Age 59 ½ 59 ½ 59 ½ 59 ½
Taxes Ordinary income taxes + 10% early withdrawal penalty
  • Contributions can be withdrawn tax- and penalty-free at any time
  • Early withdrawals may be subject to taxes and a 10% penalty if you’ve had the account for less than five years
Ordinary income taxes + 10% early withdrawal penalty Ordinary income taxes + 10% early withdrawal penalty

If you take an early withdrawal from a traditional or Roth IRA, 401(k) or any other retirement account, you’ll need to calculate your early withdrawal penalty on Form 5329 and file it with your individual tax return, Form 1040.

What about a CD early withdrawal penalty? 

A certificate of deposit (CD) is similar to a savings account, but you agree to invest your money for a fixed period of time, such as six months, one year or five years. In exchange, the issuing financial institution pays you a fixed rate of interest.

If you withdraw funds before reaching the agreed-upon maturity date, the institution may charge a penalty for withdrawing from the CD early. The penalty you’ll pay for an early withdrawal varies by the financial institution, so you should find out what the penalty is before you purchase a CD. To avoid paying an early withdrawal penalty, select your CD’s maturity date based on your expected cash needs.

You can use our calculator to estimate early withdrawal penalties applied in different CD products.

Helpful retirement withdrawal calculators 

If you’re considering making an early withdrawal from a retirement account, it’s important to understand the potential impact of your decision.

Early withdrawal calculators can help you estimate the impact of taking an early withdrawal from your IRA, Roth IRA, 401(k) or 403(b). These calculators take into account tax consequences, penalties and lost asset growth.

Here are a few early withdrawal calculators you might want to play around with before taking a distribution from your retirement savings:

Comments
Amos
  |     |   Comment #2
Excellent article.
stnemmoc
  |     |   Comment #3
though it's minor, an ewp used to also be tax deductable, at least in the past. not much help, but if you inccur one at least in a taxable acct (don't know about ira) at least let your tax person know. in the past there were situations where it was deductable (like a business expense or charity contribution is tax deductable). I don't know details but check w/you tax person.
Ann
  |     |   Comment #10
It still is. It just doesn't gain you anything overall. Your CD's 1099s reports the total amount of interest distributed to you, even if you had to give some of it back as an EWP. So you get to subtract the EWP from your income, so you don't get taxed on income you didn't really get.
MJSR71
  |     |   Comment #38
You got it, but it is not like a charity deduction (as described by stnemmoc). It is as you described, an ADJUSTMENT to income, and as such benefits all taxpayers (meaning you do not have to itemize).
Prometheus
  |     |   Comment #4
For persons with IRA funds invested in a CD, and wanting to close the CD prior to maturity and pay the EWP, there is this "gotcha":

The IRS requires the EWP be paid from IRA funds. These are, of course, oftentimes tax-advantaged funds. It would be preferable to pay the EWP out of money not inside your IRA. And the financial institution receives its EWP money, the same amount of money, either way. But the IRS has its rules.

My own personal approach would be to attempt, regardless, to pay the penalty using funds outside the IRA, relying on the likelihood that your financial institution is unaware of this IRS rule. Worst that can happen would be for them to say "no".
Nothing
  |     |   Comment #5
To me, the difference between EWP for taxes, e.g. 591/2 and EWP to CD issuer for after 65, and after 701/2 is not clear to reader. And the benefit of QCDs after 701/2 is not clear
??
  |     |   Comment #17
Ann - For further "clarification" see comment #3 of the 7/24/2018 Bank Deals Blog "CD Bank Offers 24-Month CD (3.00% APY) Nationwide"
RJM
  |     |   Comment #6
I have a 5 year CD I will be closing soon. But I find its not always that simple because the penalty calculator has its limitations.

For example, I have a 2.25% 5 year at Ally with about 46.5 months left. I know the penalty is 150 days.

However the calculator assumes I will be buying another 5 year and I probably don't want to do that yet. (looking to stay at or under 36 months) Since 2.25% is close to my top money market account at 2.26%, I don't see a huge hurry to close it just yet. I'm fairly certain I will in the next few months as better deals come up.

Is my thinking sound or should I close it even if I don't have an immediate place to put the money right now?

I know when I decide to do it, its quick & easy and will be immediately available for transfer out.

I have said before, a 3% one year, 3.25% 18 month or 3.50% 2 year are kind of what I am looking for. There is a current 18 month available at 3.15% and its close to what I am looking for except for the no ach out.

I already have a 2.75% Andrews 9 month CD and can't double up there. (Limit of one per person)

I have more CDs maturing ...one tuesday and then more near year end and just after year end with more in early Feb.

Hopefully when those roll around I will have some good intermediate term choices.
deplorable 1
  |     |   Comment #8
I would not close a CD early and take a penalty unless:
1. Your liquid cash account is paying .5% more than the CD.
2. You have another CD lined up that pays at least 1% more.
3. The EWP is 6 months interest or less and you have 24 month or more left to go.
So far I have been lucky and never needed to break a CD early.
deplorable 1
  |     |   Comment #9
Looking at your 2.25% CD with 46.5 months left. I think you will need to break it within a year as rates on liquid savings will be 2.5%-2.75% APY and 1-2 year CD's will be at least 3.25%. If you break it today and stick it into savings you will just be losing money so no point.
deplorable 1
  |     |   Comment #7
Can't you withdraw your CONTRIBUTIONS to a Roth IRA tax and penalty free at any time even if you are not 59.5? I think the Roth IRA must be 5 years old before you can do this though.
Ann
  |     |   Comment #12
https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/withdrawal_rules says there is no 5-year rule for withdrawing Roth contributions. That's only a factor if you're withdrawing more than your contribution total.
deplorable 1
  |     |   Comment #15
Thanks Ann that's even better than I thought! Although you are still better off not taking withdrawals it's nice to know that the option exists.
Rico
  |     |   Comment #16
The analysis CD EWP is ok as far as it goes. However, there are additional possible alternatives that could be save money. 1. While these are becoming rare, a savings or CD secured loan may
(depending on the duration) in the end cost less in loan interest than a CD penalty. This may be an
option if the CD is nearing maturity. 2. A home equity line of credit may also work the same way if the need for funds is a short period. Calculate the CD penalty cost against the interest expense on either of the two above options. The borrowing option could make even more sense if the CD penalty is assessed against the entire balance, regardless of the amount withdrawn.
deplorable 1
  |     |   Comment #19
Taking out a loan is a losing proposition in most cases. Why even pay interest on a short term loan at all? Just open up a credit card that has a 0% no fee balance transfer for 15 months. This has nothing to do with the timing of a early withdrawal of a CD though.
spentcattle
  |     |   Comment #24
Just wondered what are peoples thoughts on five year CD rates and where they will go in next few months in terms of locking in particularly with modest penalties. We are seeing more 3.5's
deplorable 1
  |     |   Comment #25
I would venture to guess 4% by the end of this year and 5% by the end of next year on 5 year CD's. Obviously this all hinges on the continuing strong economic growth/inflation and no crazy stock market drops. Also on what happens with interest rates globally as this seems to effect FED decisions as well as long term treasuries.
Big Words
  |     |   Comment #26
Wow, THANKS!

Go big or GO HOME!!!
RickZ
  |     |   Comment #29
For the last couple of years I’ve followed the online comments of a currency trader and PhD mathematician named Erwin Witt. Erwin posts his comments on a couple of investment and gold sites which is where I found his writings. He has been very accurate in his calls over the last two years - for example, he called the top in gold at 1361 over two years ago and thinks that will hold at least through 2019.

This is what he wrote yesterday, July 31, 2018:

“QualVar econometric analysis of the US economy now suggests that Q2 US GDP will be revised upward in the coming revisions resulting in Q1+Q2

The current Fed Funds Rate is 2.0%, the 10-year note closed today at 2.97% and the highest nationally available 5-year CDs are 3.37% at KS StateBank followed by 3.30% at CommunityWide FCU. I’m no expert on this so please draw your own conclusions, but it seems to me that if Erwin's projections are correct and the Fed Funds Rate increases by 1.25% and the 10-year note increases by 1.18% then we’d be looking at a 5-year CD at around 4.5%-4.6% at the end of 2019.
RickZ
  |     |   Comment #30
For some reason the quote was cut-off.

This is what he wrote yesterday, July 31, 2018:

"QualVar econometric analysis of the US economy now suggests that Q2 US GDP will be revised upward in the coming revisions resulting in Q1 + Q2 = 3.2%. QualVar analysis now projects US Q3 GDP will come in = 3.2% with the Fed Funds rate at 2.5% by December 31, 2018 and 3.25% by December 31, 2019. The yield on the 10 US T-Note is now projected to be 4.15% by December, 31, 2019. In conclusion, US GDP growth is projected to average 2.9% for 2018 and 2019. The effective Fed funds rate will be 3.15% by the end of 2019.”
RickZ
  |     |   Comment #31
Ugh! Why no edit function anymore? Meant to say: This is what he wrote today, July 30, 2018.
deplorable 1
  |     |   Comment #32
That pretty much falls in line with my prediction. Just for clarification when I say 4% by the end of 2018 and 5% by the end of 2019 I'm not referring to the average 5 year CD rate but the top payers, specials and local deals that will be available at that time.
larry
  |     |   Comment #33
Yep, I'm on board with that also. Keeping all our investments short and sweet. Our 2.05% one month CD matured today, so I was looking around and now the best deal is 1.82% for a one month and we went with that in our brokerage account. I see the callable CD rates are starting to creep up on the 5 yr ones.
robert
  |     |   Comment #35
would you please add a link to the comments for Erwin Witt.
Luvcd
  |     |   Comment #36
In the past when "you" were "removed" you were/are toast....Been there, done that. OR...
RickZ
  |     |   Comment #37
I follow him on disqus.com
lrdxgm
  |     |   Comment #21
One small error in the article: early withdrawals (before age 59.5, without exception) from a Roth IRA (or 401k) are *not* subject to the 10% penalty up to the contribution amounts. In the example of a $10000 contribution, all of that $10000 is withdraw-able tax and penalty free; you would only need to pay income tax and 10% penalty on earnings. And if you withdraw less than $10000 before age 59.5, you are never paying that penalty. (Unless tax laws change..)
lou
  |     |   Comment #27
This is wrong with respect to the 401k account. There is always a 10% penalty before 59.5 except for certain hardship exceptions.
lou
  |     |   Comment #28
Well, unless it's a Roth 401K, which is what I think he means.
Lrdx
  |     |   Comment #34
I meant Roth IRA or Roth 401k
wALTER
  |     |   Comment #40
AFTER YOU FILL OUT sCHEDULE 1, WHERE DO YOU PLACE THE AMOUNT FROM LINE 36

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