IRA Early Withdrawal Penalty: The 10% Tax and Every Exception (2026)

You will generally be subject to an additional 10% penalty tax for withdrawing funds from a traditional IRA before age 59 1/2 (under section 72(t) of the IRC) on top of your regular income tax liability when you withdraw money from a traditional IRA. The additional tax is applied only to the taxable amount distributed, and there are over a dozen exceptions that may exempt you from this tax altogether, such as purchasing a first home, or having a child. If you raid your SIMPLE IRA during its first 2 years, you will pay an even higher 25% penalty instead.

There are a lot of dollars lost due to this disconnect (what people think the law requires vs. what the code actually says). A flat, additional tax applies at 10%, however, many of the circumstances that you may already be in will completely eliminate it.

What is the IRA early withdrawal penalty?

The IRA Early Withdrawal Penalty is a 10% additional tax imposed by the Internal Revenue Service (IRS) for taking a distribution from a traditional Individual Retirement Account (IRA) prior to turning age 59 1/2. The Additional Tax on Early Distributions is located in the Code at 26 U.S.C. 72(t).^[1] The term "additional" reflects the central purpose of the penalty. It will be shown as a separate line item on your tax return, and will be based upon the taxable amount withdrawn, regardless of the applicable ordinary income tax liability associated with the withdrawal. Congress intended the penalty to discourage people from using their retirement savings too soon. As such, all IRAs (including the SIMPLE IRA) contain some form of this type of penalty. The IRS describes the rule the same way, noting that most early distributions face the additional 10% tax unless a specific exception applies.^[2]

How much is the IRA early withdrawal penalty?

If you're 45 and need to withdraw $20,000 from a traditional IRA to help with a cash shortfall, the additional 10% tax is $2,000, based upon the taxable portion of the distribution, and you have to pay that $2,000 no matter what your federal income tax bracket is. In addition to the $20,000 being taxed as part of your total taxable income for the year, you will also be taxed at approximately an additional $4,400 in federal income taxes if you sit in the 22% federal tax bracket. As these two amounts represent two separate and distinct bills, the income tax bill associated with a pre-tax withdrawal typically represents a larger amount than the additional tax. It is a common and costly error to assume that the 10% represents the total cost.

What are the exceptions to the IRA early withdrawal penalty?

The tax code and the IRS provide over a dozen scenarios where the 10% additional tax is not assessed, even though you are under 59 1/2. Each has its own requirements and some have a dollar limit. Most often these are the ones that are reached for by those who own an IRA, which were identified in the IRS's list of exceptions to the tax on early distributions:^[2]

Having no purchase or bill to point at, both the disaster and disability exceptions are often overlooked. The substantially equal periodic payment (SEPP) plan, also known as a 72(t), is generally used for funding an early retirement and it has specific restrictions that we cover in our 72(t) distribution guide. Regardless of which exception an individual uses, the pre-tax withdrawals will continue to be subject to ordinary income taxation. However, this exception only removes the 10% additional tax.

Why is the SIMPLE IRA penalty 25% instead of 10%?

A SIMPLE IRA is the only type of retirement account that does not follow the flat 10% penalty rule. An employee who takes a premature distribution (early distribution) before 2 years after making their first contribution to a SIMPLE IRA will be subject to the 25% penalty rate as opposed to 10%, which is specified in 26 U.S.C. 72(t)(6).^[1] This 2 year clock begins with the date of their first contribution. It does not begin when they are hired. Once an employee has participated in a SIMPLE IRA for 2 years, then the plan will revert to the standard 10% penalty rate and will have the same exceptions listed above. While this may seem like a small difference, an example demonstrates just how significant of a difference this is. For example, if an employee makes a $20,000 early withdrawal during the first 2 years of participation in the SIMPLE IRA plan, he/she/they would pay a $5,000 penalty at 25%, while at the standard 10% penalty rate, he/she/they would pay a $2,000 penalty. That is a $3,000 difference for the same distribution. All of the rules, including how the first 2 year rule affects rollover distributions, can be found in our SIMPLE IRA withdrawal rules guide.

How do you report the penalty or claim an exception?

The custodian initiates the reporting to the IRS, not you. For an under-59 1/2 withdrawal, the custodian will most likely stamp box 7 of Form 1099-R with code 1, as this code means there was an early distribution with no known exception, and therefore, the 10% additional tax is owed. When an exception applies, proving it is on you at filing time. You report the exception on IRS Form 5329, Part I, which is attached to your Form 1040. Then, using IRS Publication 590-B, you can see how each of these exceptions are calculated.^[3] You enter the numbered exception code from the Form 5329 instructions, and the form removes the 10% additional tax on that portion of the withdrawal.^[4] There can be one more bill on top of that, since some states add their own early-distribution tax and California charges an extra 2.5% on the same amount.

The Bottom Line

The IRA early withdrawal penalty is a 10% additional tax charge to be paid by you for withdrawing funds from a Traditional IRA prior to reaching age 59 1/2. This penalty will be charged in addition to your regular income tax liability. There are over a dozen exceptions that may eliminate this penalty. These include, but are not limited to, purchasing a first home, having a child born to you or adopted by you, being disabled or having large unreimbursed medical expenses. A SIMPLE IRA has a 25% penalty for the first 2 years. Check the exception list on Form 5329 before you assume the penalty applies.

This educational guide describes the IRS rules for IRA early distributions. It is not investment, legal, or tax advice. Your plan documents and current IRS limits control. Discuss this with your tax advisor in light of your company's particular situation.