Withdrawing your retirement funds early

If you’re contemplating an early withdrawal from your retirement accounts, understand your options, the potential penalties and other financial considerations.

If you withdraw money from your retirement accounts before the age of 59½, you’ll have to pay a 10% penalty to the IRS unless you qualify for an exception.

Generally, it’s unadvisable to make an early withdrawal from a retirement account, but if you’re considering doing so — whether due to a financial emergency or other life event — it’s important to understand the potential financial implications and what your alternatives may be.

We can help you evaluate your options to help you address any short-term cash flow needs while keeping your long-term financial goals in mind. As a first step, here’s what to know about penalties, exceptions and alternatives when considering an early withdrawal from retirement funds:

What’s considered an early retirement withdrawal?

Your ability to access your retirement funds penalty-free depends on your age:

If you’re under age 59½, taking funds from a retirement account is generally considered an early retirement withdrawal and you will be subject to a 10% penalty from the IRS, unless you qualify for an exception. You’ll also need to pay any applicable taxes.

If you’re age 59½ or older, you can withdraw from retirement accounts and it’s not considered an early withdrawal. That means your distributions won’t be subject to the IRS penalty, though you will need to pay any applicable taxes.

Are there exceptions to the early withdrawal penalty?

The IRS allows individuals early access to retirement funds, without being subject to the 10% penalty, in certain circumstances:

Roth IRA and Roth 401(k) exception

You will typically face a 10% withdrawal penalty on early distributions from a traditional 401(k), other employer-sponsored plans or a traditional IRA. But the rules are different with a Roth IRA or Roth 401(k): With these accounts, you will not face any penalties on withdrawing contributions no matter what age you are, since they were made on an after-tax basis. However, you will have to pay the 10% early withdrawal penalty on any earnings you take out before age 59½.

Learn more: Roth IRA benefits: 5 reasons why Roth IRAs are a powerful investment tool

The “rule of 55”

You may be able to avoid early withdrawal penalties for an employer-based retirement plan such as a 401(k) under what's known as the “rule of 55.” If you turn age 55 (or you’re already age 55+) during the calendar year you leave a job, you can begin taking distributions from that employer’s 401(k) without paying the early withdrawal penalty.

This rule does not apply to IRAs, and it only applies to withdrawals from 401(k) plans you had with your employer at the time you left your job. For certain public safety workers in governmental plans, corrections officers and private sector firefighters, the penalty is waived if separation occurs in the year you turn age 50+, or if you have 25 years of service or more in the plan.

457(b) plans

457(b) plans are not subject to the IRS 10% early withdrawal penalty.

Life events

There are a few life events that allow you to withdraw certain retirement funds early without penalty:

Education: You can withdraw funds from your IRA without penalty to pay for qualified higher education expenses for yourself, your spouse, children or grandchildren. Tuition, fees, books and necessary equipment all qualify, and eligible educational institutions include any educational institution eligible to participate in a student aid program administered by the Department of Education. However, remember, while you can borrow for education, you cannot borrow for your retirement.

Birth or adoption: You can withdraw up to $5,000 from your IRA without penalty to cover qualified expenses related to the birth or adoption of a child. Medical costs, adoption agency fees, legal costs and any other expenses directly related to the birth or adoption process all qualify. Employer-sponsored plans, such as 401(k) or 403(b) plans, may also offer this benefit (although they are not required to) so check with your plan administrator to see if this is an option.

Purchase or build your first home: You can also withdraw up to $10,000 from your IRA without penalty to buy, build or rebuild a home, provided you are a first-time homebuyer (meaning you haven’t owned a home in the previous two years). You can also use the money to help a child, grandchild or parent with a home purchase (if they qualify as a first-time homebuyer). If you’re married, your spouse can also contribute up to $10,000 from their IRA, for a total of $20,000, but know that the $10,000 cap per individual is a lifetime limit.

Advice spotlight

In most cases, it’s better to avoid early withdrawals from your retirement accounts. Even if you are in a scenario where you’re not subject to penalties, you’ll lose out on potential earnings growth if the funds had remained invested in the market instead.

Financial hardships

If you’re experiencing a financial emergency and aren’t otherwise eligible to take money out of your employer plan, you may be eligible to take a hardship withdrawal from your 401(k) — even if you aren’t yet 59½. Hardship withdrawals are intended to cover what the IRS refers to as an “immediate and heavy financial need.” Qualifying for a hardship means you can access the funds, but a premature distribution penalty may still apply depending on the reason for the distribution. (Hardship withdrawals don’t apply to IRAs because you can always access funds in an IRA without qualification, although penalties will apply.)

Because different 401(k) plans have different rules, check with your employer and plan administrator about which hardship withdrawals apply to your plan. Here’s an overview of what may qualify as a hardship withdrawal for a 401(k):

Medical expenses

Funeral expenses

Costs directly related to the purchase of your home (excluding mortgage payments)

Avoiding eviction or foreclosure on your primary residence

Certain expenses to repair damage to your home

Expenses and losses resulting from a disaster (as designated by the federal government)

What are my alternatives to early retirement withdrawals?

Even if you’re able to access money from your retirement accounts early without penalty, it’s generally not advisable as you may lose out on the growth had the funds remained invested instead.

Here are a few alternative solutions if you need liquidity quickly:

Securities-based line of credit: A securities-based line of credit allows you to borrow against the value of your nonqualified investment portfolio (but not qualified accounts such as your 401(k) or IRA). It can provide a flexible lending solution to cover unplanned expenses while keeping your investment portfolio and strategy intact.
Home equity line of credit (HELOC): A HELOC allows you to take a loan against the equity in your house, often at rates lower than other lending options. In an emergency, a HELOC can provide cash flow, provided you have sufficient equity in your home.
Loan on cash value life insurance: If you have a cash value life insurance policy, you can borrow money from the policy tax-free. Doing so, however, may permanently impact the policy, including permanently reducing the cash value and death benefit.
Borrow against your 401(k): Some qualified employer-based retirement plans, such as a 401(k) or 403(b), allow you to take out a loan against the assets in your plan, which means you’re essentially borrowing money from yourself. Like with a traditional loan, you’ll pay interest, but the interest payments go back into your account, so you’ll essentially be paying interest to yourself.