A Traditional IRA early withdrawal — money taken out before age 59½ — costs you ordinary income tax on the taxable amount plus a 10% additional tax on top. In the 24% federal bracket, pulling $10,000 out means roughly $2,400 in income tax and a $1,000 penalty, for $3,400 in federal liability before any state tax. Several IRS exceptions eliminate the 10%, and a 60-day rollover lets you undo the withdrawal entirely if you act fast.
The Two Costs You Owe
Every dollar that came from deductible contributions or investment earnings counts as ordinary income in the year you take it out. The IRS stacks that amount on top of your wages and other income, so a large withdrawal can push you into a higher bracket and cost more than the bracket you started in would suggest.
Layered on top is a flat 10% additional tax on the taxable portion of any distribution taken before 59½, unless a specific exception applies.1Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs The 10% is the same whether you’re in the 12% or 37% bracket. Most states with an income tax treat IRA distributions as taxable, and a few add their own early-withdrawal surcharge.
What You Actually Receive After Withholding
Your custodian doesn’t hand over the full amount. The default federal withholding on Traditional IRA distributions is 10%, so a $10,000 request sends $1,000 to the IRS and $9,000 to you. You can elect anywhere from 0% to 100%, but choosing 0% doesn’t erase the tax. It just shifts the bill to filing season, potentially with an underpayment penalty if you didn’t pay enough during the year.
This gap matters most if you’re planning a 60-day rollover. Receive $9,000 after withholding, and you’ll need $1,000 of outside money to roll the full $10,000 back. Otherwise the withheld $1,000 becomes a taxable distribution in its own right.
When Part of Your Withdrawal Isn’t Taxed
If you ever made nondeductible contributions to the IRA, those after-tax dollars are your basis. Basis isn’t taxed again and isn’t hit with the 10% penalty either.2Internal Revenue Service. Instructions for Form 8606 – Additional Taxes on Qualified Plans and Other Tax-Favored Accounts
You can’t cherry-pick and withdraw only the basis, though. A pro-rata rule treats each distribution as a proportional mix. An IRA with $80,000 of pretax money and $20,000 of nondeductible contributions produces withdrawals that are 20% tax-free basis and 80% taxable. You calculate the split on Form 8606. If you’ve never made nondeductible contributions, the entire withdrawal is taxable.
Exceptions That Eliminate the 10% Penalty
The IRS lists a range of situations where the 10% is waived. Income tax on the taxable portion still applies in every case; only the penalty goes away. The exceptions below are the IRA-specific rules.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Unreimbursed Medical Expenses
Medical bills you paid during the year, above 7.5% of your adjusted gross income, qualify. With $60,000 of AGI and $8,000 of unreimbursed medical costs, $3,500 escapes the penalty ($8,000 minus 7.5% of $60,000). You don’t have to itemize to use this exception.
Health Insurance While Unemployed
If you’ve received unemployment compensation for at least 12 consecutive weeks, distributions used to pay health insurance premiums for you, your spouse, or your dependents are penalty-free. The exception covers the period you’re on unemployment and continues into the year after you return to work.
Higher Education Expenses
Qualified higher education costs — tuition, fees, books, supplies, required equipment, and room and board for at least half-time students — qualify when paid for you, your spouse, or any child or grandchild of either of you.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Scholarships, Pell grants, veterans’ educational assistance, and tax-free employer educational assistance reduce the amount eligible for the exception. You can’t use both tax-free aid and a penalty-free withdrawal for the same tuition dollar.
First-Time Home Purchase
Up to $10,000 lifetime is available penalty-free to buy, build, or rebuild a first home. The money has to reach qualified acquisition costs within 120 days of the distribution. “First-time” is looser than it sounds: it means neither you nor your spouse owned a principal residence during the two years ending on the acquisition date.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The $10,000 cap is per person. Two spouses with IRAs can pull $20,000 combined for the same purchase. The home can also be for a child, grandchild, or parent.
Substantially Equal Periodic Payments (SEPP)
SEPP lets you take a series of ongoing distributions calculated using one of three IRS-approved methods.5Internal Revenue Service. Substantially Equal Periodic Payments Once you start, you have to continue for five years or until you turn 59½, whichever is later.6Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments This is where people get burned. If you modify the schedule before that period ends, the IRS retroactively applies the 10% penalty, plus interest, to every distribution you took under the plan. Start SEPP at 52 and you’re locked in for 7½ years; break it in year six and the penalty reaches back to year one.
Disability, Terminal Illness, and Death
Distributions taken after you become totally and permanently disabled are penalty-free, with a physician’s certification that you can’t perform substantial gainful activity because of a condition expected to result in death or last indefinitely.
A separate SECURE 2.0 provision covers terminally ill individuals certified by a physician. Distributions on or after the certification date escape the penalty, and unlike the disability exception, terminally ill individuals can repay within three years if their condition improves.7Internal Revenue Service. Safe Harbor Explanations – Eligible Rollover Distributions (Notice 2026-13)
When an IRA owner dies, distributions to a beneficiary are penalty-free regardless of the beneficiary’s age. Income tax still applies to the taxable portion.
Birth or Adoption
Each parent can withdraw up to $5,000 per child within one year of a birth or a finalized adoption. You can repay within three years; if you do, the distribution is treated as a rollover and you can amend to recover the income tax you paid.
Domestic Abuse
Beginning in 2024, victims of domestic abuse by a spouse or domestic partner can withdraw the lesser of $10,000 (indexed for inflation) or 50% of the account balance without the penalty. Repayment within three years is treated as a rollover.
Emergency and Disaster Distributions
One emergency personal expense distribution per calendar year is available for up to $1,000 (or your balance minus $1,000, if less) for unforeseeable personal or family needs. Three years to repay, and you can’t take another emergency distribution during that window unless you repay the first one or make equivalent new contributions.
If you live in a federally declared disaster area and suffer an economic loss, up to $22,000 is available penalty-free, with three years to repay all or part as a tax-free rollover.8Internal Revenue Service. Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
Other Exceptions
- IRS levy on the IRA (only actual executed levies, not voluntary withdrawals to pay a tax bill).
- Qualified reservists called to active duty for at least 180 days, during the active-duty period.
- Long-term care insurance premiums, up to $2,500 per year (indexed), starting in late 2025. Implementing guidance hadn’t been issued as of the source.
- Contributions withdrawn before the extended due date of your return, with any earnings included in income.
Undoing the Withdrawal: The 60-Day Rollover
If you change your mind, you have 60 days from the date you received the money to deposit it back into the same or another IRA. Meet that deadline and the IRS treats the transaction as if it never happened — no income tax, no penalty.9Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Two limits shape this. First, you get only one indirect (60-day) rollover across all your IRAs in any 12-month period. The one-per-year rule aggregates every Traditional, Roth, SEP, and SIMPLE IRA you own; direct trustee-to-trustee transfers don’t count. Second, if you miss the 60 days, the full amount becomes a taxable distribution subject to the 10% penalty. A self-certification procedure lets you attest that you missed the deadline for a qualifying reason such as hospitalization, a postal error, or a financial institution’s mistake.10Internal Revenue Service. Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
Remember withholding: if the custodian held back 10%, you received only 90%. To roll the full amount and avoid any taxable event, you have to replace the withheld portion from your own funds. You get the withheld amount back as a refund when you file.
SIMPLE IRA: The 25% Trap
If the account is a SIMPLE IRA and you take an early distribution within the first two years of participating in the plan, the penalty is 25%, not 10%. After two years, the standard 10% applies. The two-year clock runs from the date your employer first deposited contributions into the SIMPLE IRA, not the date you opened the account. This also catches people who roll a SIMPLE IRA into a Traditional IRA inside the two-year window, so check the calendar before moving money.
Reporting It on Your Return
Your custodian sends Form 1099-R by January 31 of the year after the distribution. Box 7 carries a distribution code: Code 1 is a standard early distribution subject to the penalty, Code 3 is disability, Code 4 is death, and other codes flag various exceptions.11Internal Revenue Service. Instructions for Forms 1099-R and 5498
If your 1099-R shows Code 1 but you qualify for an exception, file Form 5329 with your return and enter the exception number that fits your situation. That form is how you formally claim the exception. Skipping Form 5329 when you owe no penalty is a common mistake; without it, the IRS has no record of your exception and may assess the 10% automatically.
If you’ve made any nondeductible contributions over the years, also file Form 8606 to calculate the nontaxable portion. The 1099-R usually shows the full distribution in Box 1 without separating your basis, so Form 8606 is the only mechanism for avoiding tax on money you already paid tax on.