10% Penalty Exceptions: IRAs and Plans
If a person under age 59½ takes a withdrawal from his IRA or workplace plan, there is a 10% early withdrawal penalty…unless an exception applies. There are currently 20 exceptions, with a 21st on the way. Here are those exceptions, with some brief commentary.
Exceptions Applicable to BOTH Plans and IRAs (Note: Check to make sure your plan allows in-service withdrawals for any plan-specific exceptions.):
- Death. Withdrawals from inherited accounts are always penalty free.
- Disability. High hurdle. Being “retired on disability” may not qualify.
- 72(t). The program must run for 5 years or until age 59½, whichever is longer. Tread carefully with this exception!
- Medical Expenses (Over 7.5% Adjusted Gross Income). You will need to do some math with this one.
- IRS Levy. If the IRS takes your money, there is no 10% penalty. Awesome.
- Active Reservists. A function of active duty and when the distribution is taken.
- Birth or Adoption. Up to $5,000 per child. Must be the parent of that child to qualify. (Aunts and uncles of the new family member cannot leverage this exception.)
- Terminal Illness. Death is reasonably expected within 7 years. No limit on the amount.
- Federally Declared Disasters. Capped at $22,000. The IRS provides a list of current disaster areas here: Tax relief in disaster situations | Internal Revenue Service.
- Domestic Abuse. An unfortunate reason for the need of a spouse or domestic partner to access retirement funds, up to the lesser of $10,000 or 50% of account
- Emergency Expenses. $1,000 cap, but it might get a person to their next paycheck.
Exceptions Applicable to IRAs Only (Including SEPs and SIMPLEs):
- Higher Education Expenses. Available to the IRA owner and certain family members.
- First Time Homebuyer. Lifetime cap of only $10,000.
- Health Insurance If You Are Unemployed. Pretty straightforward.
Exceptions Applicable to Plans Only (Not Including SEPs or SIMPLEs):
- Age 55. You must separate from service in the year you turn age 55 or older.
- Age 50 or 25 Years of Service for Public Safety Employees. Same as above, except the earlier of age 50 or 25 years of service, and only applicable to certain groups of workers.
- Section 457(b) (Governmental) Plans. Withdrawals are always penalty-free from these plans.
- Divorce (QDRO “Qualified Domestic Relations Order”). A QDRO allows the receiving ex-spouse to have penalty-free access to the funds while they are in the plan.
- Phased Retirement Distributions from Federal Plans. Very complex. Allows full-time employees to work part-time schedules while beginning to draw retirement benefits.
- Pension-Linked Savings Accounts. Limited to $2,500. This is an optional add-on feature for plans like a 401(k).
Exception #21, effective December 29, 2025, is for plans only and applies to premium payments for certain long-term care policies. But we will cross that bridge when we get to it.
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.