Early withdrawals: the 10% additional tax, the "rule of 55" and other exceptions

Retirement accounts get favorable tax treatment because they are meant for retirement. To discourage earlier use, the tax code adds a cost to taking money out too soon. The law also lists a number of exceptions, and which ones are available depends heavily on the type of account.

The general rule

The IRS explains that amounts withdrawn from an IRA or retirement plan before age 59½ are called early distributions, and that individuals must pay an additional 10% early withdrawal tax unless an exception applies.

Three points frame everything else:

• The 10% is an additional tax. It is charged on top of the regular income tax due on the withdrawal.
• It applies to the portion of the distribution that is included in gross income. A return of after-tax contributions is not subject to it.
• An exception removes only the extra 10%. The withdrawal itself is still taxable income in most cases.

As a hypothetical illustration, suppose a 45-year-old withdraws $10,000 from a pre-tax 401(k) and no exception applies. The $10,000 is added to taxable income for the year, and a further $1,000 is owed as the additional tax.

The rule of 55

"Rule of 55" is an informal name for the separation-from-service exception. The IRS describes it as applying when the employee separates from service during or after the year the employee reaches age 55. For certain public safety employees the age is 50; the IRS page lists who qualifies.

The details determine whether it helps:

• It applies to workplace plans, not IRAs. The IRS table marks this exception "yes" for qualified plans such as 401(k)s and "no" for IRAs.
• It is tied to the plan of the employer the person just left. Money in plans from earlier jobs, where the person left before the year they turned 55, is not covered by that separation.
• The timing is by calendar year. Leaving the job at 54 qualifies if the person turns 55 later that same year. Leaving at 53 does not qualify, even after the person reaches 55.
• Rolling the money to an IRA gives up the exception. Once the balance is in an IRA, IRA rules apply, and the next age-based threshold is 59½.
• The plan has to allow the withdrawal. The tax exception does not require a plan to offer partial or periodic withdrawals. Some plans allow only a full lump sum.

Someone leaving a job between 55 and 59½ who may need to draw on the account has a reason to look at this before moving the money. The general choices are laid out in the guide to options for an old 401(k).

Other exceptions by account type

Both workplace plans and IRAs

The IRS table lists these among the exceptions available for both workplace plans and IRAs:

• Death of the account owner (distributions to a beneficiary or estate).
• Total and permanent disability.
• A series of substantially equal periodic payments (described below).
• Unreimbursed medical expenses above 7.5% of adjusted gross income.
• Qualified birth or adoption distributions, up to $5,000 per child.
• Qualified disaster recovery distributions, up to $22,000, for federally declared disasters.
• Emergency personal expense distributions: one per calendar year, up to the lesser of $1,000 or the vested balance over $1,000.
• Distributions to victims of domestic abuse, up to the lesser of a dollar cap or 50% of the account. The cap is indexed for inflation; IRS Notice 2026-66 lists it as $10,500 for 2026 and $10,900 for 2027.
• Distributions to a terminally ill individual, a category listed in Publication 590-B for IRAs and in IRS Topic 558 for workplace plans.

IRAs only

• Qualified higher education expenses.
• A first-time home purchase, up to $10,000.
• Health insurance premiums paid while unemployed, for someone who received unemployment compensation for 12 consecutive weeks after losing a job.

These are marked "no" for qualified plans in the IRS table. A withdrawal from a 401(k) to pay tuition, for example, does not escape the 10% additional tax, though the same withdrawal from an IRA would.

Workplace plans only

• Separation from service in or after the year of reaching age 55 (the rule of 55).
• Payments to an alternate payee, such as a former spouse, under a qualified domestic relations order. See divorce and retirement accounts.

Substantially equal periodic payments

This exception allows withdrawals at any age if they follow a fixed schedule. The IRS explains that the 10% additional tax does not apply to a series of substantially equal periodic payments made over the taxpayer's life expectancy, calculated under one of three approved methods.

The conditions are strict. According to the IRS, the series cannot be modified before the later of five years from the first payment or the date the person reaches 59½. If it is modified, the 10% tax is applied retroactively to the earlier payments, with interest. No other additions to or withdrawals from that account are allowed while the series is in effect. For a workplace plan, the person must have separated from service before payments begin.

Special cases

Roth IRAs. Regular contributions to a Roth IRA can be withdrawn at any age without income tax or the additional tax. Earnings and recently converted amounts follow different rules, explained in the Roth IRA five-year rules.

SIMPLE IRAs. The IRS notes that distributions from a SIMPLE IRA within the first two years of participation incur a 25% additional tax instead of 10%.

Governmental 457(b) plans. The IRS states that distributions from a governmental 457(b) plan are not subject to the 10% additional tax, except for amounts attributable to rollovers from another type of plan or IRA.

Reporting

The payer reports the distribution on Form 1099-R, with a code indicating whether a known exception applies. The IRS says Form 5329 is used to report the additional tax, and also to claim an exception when the code on Form 1099-R does not show one.

Because exceptions have detailed conditions and individual tax situations and state rules vary, a tax professional can advise on specifics.