How to Avoid the 10% Excise Tax on Early IRA Withdrawals

To avoid the 10% early IRA withdrawal penalty, you generally need to fit your distribution into one of the statutory exceptions under Internal Revenue Code Section 72(t), take the money from Roth contributions that are always free to withdraw, set up a series of substantially equal periodic payments, or return the funds within 60 days.¹ Whichever route you use, you also have to tell the IRS about it on your return; the custodian who sent you the check usually will not.

The list of exceptions is longer than most people think, and the SECURE Act of 2019 and SECURE 2.0 Act of 2022 added several more. Each has its own dollar cap, timing rule, and paperwork.

Withdraw Roth Contributions First

If the account you’re pulling from is a Roth IRA, the penalty may never come up. The IRS applies a fixed ordering system to every Roth distribution: your direct contributions come out first, then conversion amounts, then earnings.

Direct Roth contributions can be withdrawn at any time, at any age, with no tax and no penalty. You already paid income tax on that money before contributing it. If your total Roth contributions over the years add up to $40,000 and you withdraw $30,000, the entire withdrawal comes from contributions and you owe nothing.

Converted amounts come out next. The converted principal generally comes out without income tax because you paid tax at conversion. But if you withdraw converted funds within five years of the conversion and you’re under 59½, the 10% penalty applies unless one of the exceptions below covers you. Each conversion has its own five-year clock, starting January 1 of the tax year you made the conversion.

Earnings are last in line and the strictest. Earnings withdrawn before 59½ are subject to income tax and the 10% penalty unless the account has been open at least five years and you meet a qualifying exception. So the practical rule for Roth savers: withdraw no more than you have contributed, and the penalty question does not arise.

Exceptions That Waive the Penalty

For traditional IRA money, and for Roth money that would otherwise be penalized, the IRS recognizes a specific list of situations where the 10% is waived. You still owe ordinary income tax on the taxable portion. The burden of proving you qualify falls on you.²

Death

Distributions paid to a beneficiary after the IRA owner’s death are exempt, regardless of the beneficiary’s age or the deceased owner’s age.²

Total and Permanent Disability

The IRS definition is strict: you must be unable to perform any substantial gainful activity because of a physical or mental condition that a physician determines is expected to result in death or last indefinitely.²

Terminal Illness

If a physician certifies that you have a condition reasonably expected to result in death within 84 months, distributions from your IRA are exempt.² The certification must be obtained at or before the time of the distribution. There is no dollar cap.

Unreimbursed Medical Expenses

Only the amount of medical expenses that exceeds 7.5% of your adjusted gross income qualifies.² If your AGI is $80,000 and your unreimbursed medical bills total $10,000, only $4,000 escapes the penalty. The rest of the withdrawal is penalized.

Health Insurance Premiums While Unemployed

If you received federal or state unemployment compensation for at least 12 consecutive weeks, you can take a penalty-free distribution to pay health insurance premiums for yourself, your spouse, or your dependents.² The distribution must occur in the year you received unemployment or the following year, and you lose the exception if you’ve been re-employed at least 60 days before the distribution.

Qualified Higher Education Expenses

Tuition, fees, books, supplies, and equipment at an eligible postsecondary institution qualify, for you, your spouse, your children, or your grandchildren. Tax-free scholarship and grant money reduces the amount that qualifies, so only the net out-of-pocket cost counts.²

First-Time Home Purchase

You can pull up to $10,000 from an IRA over your lifetime to buy, build, or rebuild a first home without the 10% penalty.² “First-time homebuyer” is more generous than the phrase sounds: it covers anyone who has not owned a principal residence during the two years ending on the date they acquire the new home. The funds must be used within 120 days of the distribution.³

Birth or Adoption

Within one year of a child’s birth or the finalization of an adoption, you can withdraw up to $5,000 per child. If both spouses have IRAs, each can take $5,000 for the same child. You can repay the distribution to an eligible retirement plan within three years and then file amended returns to recover the income tax you paid.¹

Domestic Abuse

If you experienced domestic abuse within the prior 12 months, you can self-certify and withdraw the lesser of $10,000 (indexed for inflation) or 50% of your account balance without the penalty. The definition covers physical, psychological, sexual, emotional, or economic abuse. You have three years to repay and recover the income tax. This exception applies to distributions made after December 31, 2023.

Emergency Personal Expenses

SECURE 2.0 allows a penalty-free withdrawal of up to $1,000 for unforeseeable or immediate financial needs. You can only take one per calendar year, and you cannot take another for three years unless you repay the previous one in full or make plan contributions equal to the amount you withdrew. The distribution is limited to the lesser of $1,000 or your vested account balance minus $1,000.

Federally Declared Disasters

If your primary residence is in a federally declared disaster area and you suffered an economic loss, you can take up to $22,000 from your IRAs and retirement plans combined. The distribution must be requested within 180 days of the disaster. You can spread the taxable income over three years and repay within that same window; repayment lets you file amended returns to recoup the taxes.⁴

Long-Term Care Insurance Premiums

Starting in 2026, you can withdraw up to $2,500 per year (indexed for inflation) to pay premiums for qualifying long-term care insurance. Ordinary income tax still applies.

IRS Levy and Qualified Reservist Distributions

If the IRS levies your IRA to collect a tax debt, the seized amount is exempt. Members of the military reserves or National Guard called to active duty for more than 179 days can take penalty-free distributions during the active duty period.²

Set Up Substantially Equal Periodic Payments

If none of the exceptions fits, a series of substantially equal periodic payments, commonly called a SEPP plan or a 72(t) distribution, lets you draw a regular income stream from your IRA before 59½ without the penalty. The trade is that you commit to the payment schedule for a set period.³

The IRS allows three calculation methods: the required minimum distribution method, the fixed amortization method, and the fixed annuitization method.⁵ The RMD method produces the lowest payment and fluctuates each year; the amortization and annuitization methods produce higher, fixed annual payments.

Once you start, you cannot stop or change the payment amount until the later of five years from your first payment or the date you turn 59½.³ One adjustment is permitted: a one-time switch from the fixed amortization or annuitization method to the RMD method. Any other modification before the required period ends triggers a retroactive recapture. The IRS goes back and imposes the 10% tax on every distribution you took under the SEPP plan, plus interest from the original date of each distribution.⁵

This is where most SEPP plans go wrong. Take an extra dollar beyond the calculated amount, or skip a payment, and the IRS treats the entire series as modified. For someone starting a SEPP at age 50, that’s a minimum nine-and-a-half-year commitment with no room for error. Work with a tax professional to set the calculations and schedule before starting.

Put the Money Back Within 60 Days

If you have already taken a distribution and want to undo it, the IRS lets you roll the funds back into an IRA (or another eligible retirement plan) within 60 days of receiving them. A successful rollover means the distribution is not treated as taxable income and the 10% penalty does not apply.⁶

Two limits. You can only do one 60-day rollover from an IRA to another IRA in any 12-month period. Direct trustee-to-trustee transfers between custodians don’t count toward this limit, so use those when possible. And the 60-day clock is strict. Miss it by a day and the distribution becomes taxable and potentially penalized.

If you miss the deadline for reasons beyond your control, such as a hospitalization, postal error, or federally declared disaster, the IRS has a self-certification procedure that may let you complete a late rollover. You can also apply for a private letter ruling waiving the deadline, though that takes time and comes with a filing fee.⁶

Claim the Exception on Your Return

Qualifying for an exception is only half the job. Your IRA custodian reports every distribution on Form 1099-R. Box 7 contains a code that tells the IRS how the distribution is categorized.⁷

Code 1 means “early distribution, no known exception.” Custodians use Code 1 when they don’t know whether you qualify, which happens frequently. Many exceptions, including medical expenses, education costs, first-time home purchases, and birth or adoption, are reported by the custodian as Code 1 and then claimed by you on your return.⁷ Code 2 means the custodian already knows an exception applies, such as a SEPP distribution or an IRS levy.

To claim the exception, file Form 5329 (Additional Taxes on Qualified Plans and Other Tax-Favored Accounts) with your Form 1040.⁸ Part I is where you enter the distribution amount, apply the appropriate exception code, and compute any penalty. If your 1099-R shows Code 1 but you qualify for an exception, Form 5329 is how you tell the IRS. Skipping it when you have a valid exception is one of the easiest ways to get a penalty assessment you didn’t actually owe.

If you made nondeductible contributions to a traditional IRA, also file Form 8606 to calculate the taxable and nontaxable portions of your distribution. The 10% penalty only applies to the taxable portion, so failing to track your basis on Form 8606 can mean overpaying both income tax and the penalty.

One Boundary Worth Knowing

The “Rule of 55” that lets people take penalty-free distributions from a 401(k) or 403(b) after separating from service at age 55 or later does not apply to IRAs.² If you roll a 401(k) into an IRA and then try to withdraw before 59½, you lose access to the age-55 exception. If you’re planning an early retirement between 55 and 59½, think twice before consolidating employer plan money into an IRA.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Internal Revenue Service. Substantially Equal Periodic Payments
4
Internal Revenue Service. Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
5
Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments
6
Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans
7
Internal Revenue Service. Instructions for Forms 1099-R and 5498
8
Internal Revenue Service. Instructions for Form 5329