5 Tax Rules for Taking an Early Withdrawal from a Retirement Account

Money Girl outlines the 5 tax rules you must know before taking an early withdrawal from your retirement account.

Laura Adams, MBA
1-minute read

Early Withdrawal from Retirement AccountQ. I still have a retirement account with an old employer. Can I roll over some of it into a traditional IRA and withdraw the rest to pay down debt? If so, how would this affect my taxes?

A. Any time you withdraw funds from a traditional retirement account—like a 401(k), 403(b), or a traditional IRA—there are tax consequences.

Here are 5 retirement tax rules you should know:

Rule #1      

Withdrawals from a traditional retirement account are taxed as ordinary income, not capital gains.

Rule #2        

If you’re younger than age 59½, taking money out of a traditional retirement plan is generally considered an early withdrawal and is subject to an additional 10% tax penalty.

Rule #3         

The 10% early withdrawal penalty doesn’t apply to withdrawals of contributions that were taxed before you put them in a retirement account.

Rule #4          

If you roll over funds from one qualified retirement plan to another within 60 days, the transfer is not subject to income tax or an early withdrawal penalty.

Rule #5        

There are some exceptions to the 10% early withdrawal penalty, including using retirement funds for certain medical expenses. The exceptions are different depending on whether you withdraw from a workplace plan or an IRA.

For more information about taking early distributions from retirement plans, see IRS Publication 575, Pension and Annuity Income.

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.