Early distribution from an IRA

You have spent time building a modest nest egg for retirement. As with many things in life, however, unexpected events occur. Through no fault of your own, you need to take an early withdrawal from your IRA. Will you face penalties for your proactive portfolio management?

What happens if I take an early distribution from a traditional IRA or a Roth IRA early withdrawal?

IRAs are retirement accounts, so these types of accounts discourage other forms of use. If you receive a non-exempt distribution from a traditional IRA before the age of 59½, you pay regular income taxes plus a further 10 percent. You can avoid the penalty on the early distribution from your IRA under certain exempted circumstances, such as when you are paying for higher education.

Roth IRA early withdrawal rules are a bit more flexible. Although an early distribution from a Roth IRA is defined using the same benchmark age, you can take an early distribution from your IRA no matter the reason at any time. This leeway, however, only applies when you are withdrawing money that you contributed.

If you want to take a larger Roth IRA early withdrawal you have to be careful. If you try to remove funds from your account’s earnings, you might end up having to pay the same tax-plus-10-percent penalty that is assessed on traditional IRA early distributions. Penalty-exempt situations include suffering a disability, beneficiaries’ distribution, and buying a first home.

Who should care about taking an early distribution from an IRA? With the majority of Americans having under $1,000 saved for retirement, accessible investing ought to be a concern for everyone. As self-guided retirement accounts, IRAs may a wise choice for those who want to start preparing for the future.

Taking an early distribution from your IRA

How to Take an Early Distribution From Your IRA

One of the nice things about IRAs is that they are incredibly convenient to manage. All you have to do to complete your early withdrawal or distribution is to log in to your preferred investment app, specify how much you want to receive and withhold for taxes, and finish the transaction.

IRA Types

Retirement accounts can get confusing. Understand these terms before deciding to take an early withdrawal from your IRA:

  • A Traditional IRA is an account that you contribute to before or after taxes to take advantage of tax-deferred growth.
  • A Roth IRA is an account that you contribute to after taxes to enjoy tax-free withdrawals later.
  • A Savings Incentive Match Plan for Employees, or SIMPLE, IRA lets small business employees put money away and get mirrored contributions from their company.
  • Simplified Employee Pension, or SEP, IRA lets business owners set up traditional IRA retirement accounts for themselves and their staff members. The employee does not contribute, but they get 100 percent vesting in, or ownership of, the money in the plan.

Types of Distributions and IRA Early Withdrawal Exceptions

An early, or premature, withdrawal is when you take money from an IRA before you are 59½ years old. It is essential to distinguish these traditional and Roth IRA early withdrawals from qualified, or non-penalized, withdrawals. The best source of information is Internal Revenue Code Section 72(t), more commonly known as Rule 72t. This law defines numerous loopholes, such as when

  • An IRA owner dies,
  • The traditional or Roth IRA early withdrawals are made in a series of substantially equal periodic payments, or SEPPs,
  • Early distributions from an IRA go towards unreimbursed medical bills, first-time homes or higher education, or
  • An IRA beneficiary is a qualified military reservist receiving distributions.

Required Minimum Distribution (RMD)

Even though taking an early distribution from an IRA is generally frowned upon by the IRS, these retirement vehicles are not meant to continue. When you reach age 70½, you have to take a required minimum distribution, or RMD. While you are permitted to take out more, you might pay a 50 percent tax penalty for taking less than the minimum. The RMD rules do not apply to Roth IRAs.

Hardship Early Distributions From an IRA

These withdrawals occur in response to immediate, heavy financial necessity. Think last-resort emergency purchases, such as covering your child’s tuition after getting fired or paying your mortgage to avoid foreclosure.

Series of Substantially Equal Periodic Payments (SEPPs)

These payment plans let you get around the 72t laws to avoid the penalty income tax. The catch is that you do not get the money all at once. The money is portioned out in a series of payments that last for at least five years or until you reach age 59½.

Although they are not good for getting money quickly, these plans include a variety of calculation options that let you customize your withdrawals. The formulas involve some complicated amortization, however, so it may be wise to solicit legal counsel before trying to set up a plan.

Death Withdrawals

The early distribution penalty only continues through your lifetime. After your death, your beneficiaries can take early withdrawals from your IRA without incurring the extra 10 percent.

Disability Early Withdrawals

Disability-based IRA distribution exceptions apply when an IRA owner suffers a total and permanent disability. The standards for proving you made an exempt Roth IRA early withdrawal are high.  You have to get a doctor to attest that your impairment is so severe that you cannot maintain gainful employment.

Education Withdrawals

You can take an early distribution from an IRA and pay no penalty if the withdrawal goes towards a qualified higher education expense. In other words, you can pay for your own or your relatives’ tuition, student activity fees and certain other associated costs.

Although the 72t rule does not outright define every qualified expense, it is best to be cautious. For instance, things like books are not covered even though it seems like they might qualify for the early distribution from an IRA education expense exception.

Early IRA distribution and estimated penalty

How much will the early distribution penalty be?

It is usually easy to estimate your penalty for taking an early distribution from an IRA. With the traditional, SEP and Roth varieties, it is an extra 10 percent of the tax burden you would normally incur for a given withdrawal. In other words, your traditional and Roth IRA early withdrawal damages will vary depending on when you withdraw.

Calculating the penalty on an early distribution from an IRA gets a bit more involved with SIMPLE IRAs. If your plan is less than two years old at the time you take the early withdrawal, then the penalty jumps to 25 percent. After that, you will pay the standard 10 percent.

Other 72t Exceptions to Early Distribution Penalties

There are a few other ways to avoid premature distribution penalties. Although not all of them are ideal situations to find oneself in, it is good to know when the distributions are permitted.


Waiting until you reach age 59½ is the most straightforward option for avoiding penalties. It is also the smartest way to manage your account from a wealth-building perspective. Since it takes time to accumulate equity, leaving your IRA alone while it matures is best.

Automatic Enrollment

If you have future SIMPLE IRA benefits due to your employer’s automatic enrollment practices, then you may be eligible for penalty-free permissive withdrawals. Many automatic enrollment plans let you modify specific terms, such as changing the amount you contribute. Making adjustments may change your withdrawal rights, however, so read the contract carefully before initiating an early distribution from an IRA.

First-time Homebuying

Rule 72t lets you take an early distribution from an IRA and use it to pay for a first home. This early distribution penalty exception is limited to $10,000 of the property’s price. To become an eligible “first-time” homebuyer, you cannot have owned a home or held stake in one for the past two years.

IRS Levies

In tax trouble? If the IRS levies your retirement plan and removes some of the money, it does not count as an early distribution from an IRA or Roth IRA early withdrawal.


Some people avoid the additional tax on early distributions by using traditional or Roth IRA early withdrawals to cover medical expenses. Others pay their health insurance premiums during periods of unemployment and leave it to their portfolios to rebalance and recover.

As long as you will not be reimbursed for these expenses, they are potentially penalty-exempt reasons to withdraw. Your medical bills simply have to exceed 10 percent of your adjusted gross income, or AGI. You can use the early distribution from a Roth IRA to pay the amount of the bill minus the 10 percent AGI amount.

Military Reservist

If you are a qualified military reservist who gets deployed, then you can receive certain early distributions from an IRA without a penalty. These distributions have to occur during your active duty period. With loan-type Roth IRA withdrawals, you have a limited time to repay the money.

Returned IRA Contributions

You can take an early distribution from an IRA to recover your previous retirement contributions if you do so before the extended due date of your tax return for that year. This exception to the traditional and Roth IRA withdrawal penalties does not apply to any of the earnings you derive from your contributions.

Early distribution from an IRA: everything you need to know.


A rollover is the process of transferring money between retirement plans. To avoid the penalty associated with taking an early distribution from an IRA, you can perform an in-plan rollover. In other words, you will move funds from a traditional IRA to a Roth IRA on the same plan.

Want to use your early distribution from an IRA to diversify with other kinds of retirement planning? You can avoid the penalty for traditional and Roth IRA early withdrawals by contributing the distributions to other IRAs, 401(k)s or similarly qualified retirement plans. Just be sure to finalize each rollover transfer within 60 days of receiving the source early distribution from an IRA.

One point to remember about rollovers is that individual plans may place their own limitations on certain transfer activities. The law also bars you from reversing a rollover after the fact, so plan wisely.

Roth IRA Early Withdrawals vs. Traditional IRA Early Distributions

Roth IRA Early Withdrawals vs. Traditional IRA Early Distributions

Not all premature distributions are the same. With a Roth IRA, you have far more leniency. Thanks to the fact that you already paid taxes on your contributions, you do not have much cause to worry about Roth IRA early withdrawal problems as long as you are not taking out any earnings, such as interest or dividends.

If you are confused by the distinction, just remember that your contributions are limited to the funds that you deposited in your Roth IRA. Everything else is earnings and ineligible for the Roth IRA early withdrawal break.

Traditional vs. Roth IRA: Withdrawal Timeframes

By now, you may have guessed that there is a small catch. To qualify for IRA distribution exceptions, your Roth withdrawals must take place no sooner than five years after you open the account.

Using an Early Distribution From an IRA to Kick Your Retirement Plan Into Gear

Rule 72t should not be the only thing you worry about when deciding whether to initiate a Roth IRA early withdrawal or receive an early distribution from an IRA. Penalties aside, taking certain premature distributions may be a highly sound decision, especially when it lets you pursue more profitable investment alternatives.

Knowing when to risk a Roth IRA early withdrawal is much easier when you are an informed investor. With M1 Finance, you gain the insights that keep you abreast of your retirement account’s lifecycle, so it is easier to avoid mistakes. Having anytime, anywhere access to a powerful dashboard and smart investment data also empowers you to devise strategies that make the most of diverse assets, IRA tax exemptions and total portfolio control. Curious how IRA early withdrawal exceptions might impact your portfolio? Get in step with your economic future by signing up for M1 Finance now.