Early Retirement Account Withdrawal FAQs
Considering if you should borrow money from your retirement account pre-retirement? Here's what you should know before you make that decision.

Are you considering an early withdrawal from your pension or retirement accounts? Many people are, in part because of the tremendous economic disruptions of the past few years. Many businesses—and many more jobs—were lost during the pandemic. Those losses forced people to reevaluate their retirement plans and, often, retire early. Even without a global pandemic, life can throw you a curve ball in the form of unexpected medical bills, divorce, disability, or more. As a result, you may want to consider early withdrawals from your retirement account, even if you’re not retiring yet.
Early withdrawals, however, can be a costly proposition, so we’re addressing some of the most common questions and concerns people have when considering early withdrawals. Because so much of this subject concerns tax laws, always make sure you’re acting on up-to-date information, and consult your financial professional.
What are early withdrawals?
An early withdrawal is money you take from your qualified retirement plan before turning 59 ½ (for IRAs) or before the plan’s specified retirement age (for 401(k)s). Qualified retirement plans include traditional and Roth IRAs, employee retirement plans such as 401(k)s, and employee annuity plans such as 403(a)s and 403(b)s. Some plans may not allow early withdrawals, or may allow them only with specified penalties—and early withdrawals are generally taxed as income. Early withdrawals from annuities—intended as long-term investments—are also generally subject to tax and may incur surrender charges, market-value adjustments, and a 10% penalty, unless an exception is met.
Are early withdrawals only for early retirement?
No. You might take early withdrawals while you continue to work full or part-time. As mentioned above, you might consider one-time or periodic early withdrawals when you have a partial or total loss of income, higher than expected bills, or unexpected life changes, such as divorce or death.
What about penalties?
Qualified retirement plans are popular, in part because they have tax benefits. Federal law allows you to make contributions to most plans, such as traditional IRAs and 401(k)s, with pre-tax dollars. To encourage you to save for retirement, the government doesn’t tax these dollars until you take them out after you retire. To discourage you from taking out money before you retire, distributions or withdrawals you make before you turn 59 ½ are generally subject to a 10 percent penalty and are taxed as gross income. For example, in an early withdrawal of $10,000, you would likely be charged $1,000 in penalty and $2,000 in withholding (subject to the actual income tax due), leaving you with $7,000. And keep in mind, withdrawals that you make early are no longer available to generate interest income, so your retirement fund grows more slowly1.
Are any early withdrawals exempt from a penalty2,3,4?
Yes. There are a variety of exemptions from federal penalties for IRAs and 401(k)s. The exemption may vary based on your contract or plan. These exemptions may include:
Rollovers—If you reinvest your early withdrawal into another retirement account within 60 days, you can avoid the penalty and the tax if you make only one rollover in a year.
Disability—Total and permanent disability exempts you from the penalty.
Unreimbursed medical expenses—If your unreimbursed medical expenses exceed 10% of adjusted gross income, you may be able to take an early distribution up to that amount. If either you or your spouse is over 65, your medical expenses need only exceed 7.5% of adjusted gross income.
Leaving a job at 55—You can be exempt from the penalty if you are at least 55 years old at the time you leave your job—or just 50 if you work in one of several categories of federal law enforcement or public safety.
Health insurance premiums—If you use the early withdrawal from an IRA to pay health insurance premiums while you’re unemployed, you may be able to do so without penalty.
Other situations that may qualify you for penalty-free early withdrawals include a variety of hardship expenses, such as buying or repairing a home (under specific conditions), paying for higher education (again, with limitations), and funeral expenses. Rules for IRAs and 401(k)s sometimes differ, so be sure to speak with a financial professional.
What are the alternatives to early withdrawals?
Retirement funds are meant for retirement. Early withdrawals are best used only as a last resort to meet emergencies and unexpected expenses. Better ways to take care of sudden expenses include a comprehensive financial plan that takes the possibility of such expenses into account. Build an emergency fund to handle six months of regular expenses if you’re suddenly unable to work—whether you’re laid off or disabled. Consider funding options that may already be open to you, such as a home equity line of credit, or a portfolio line of credit against your securities.