Key Points
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IRAs are tax-advantaged accounts that the government has strict rules for.
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Withdrawals made before age 59 1/2 typically have a 10% early withdrawal penalty.
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Explore all the possible strategies you can use to get the funds you need before tapping your retirement savings early.
You probably already know that saving for retirement can be challenging. It’s not just finding money you can spare. You also have to decide where to put it and what to invest it in, so it’ll be worth more — hopefully a lot more — by the time you’re ready to retire.
In addition, you have to follow the government’s rules when it comes to taxes and withdrawals, or else you could face steep tax penalties. There’s one type of IRA withdrawal in particular that could set you back if you’re not careful.
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How IRAs work
IRAs are tax-advantaged retirement accounts, meaning they can save you money either now or in retirement. Traditional IRAs give you a tax break in the year you make your contributions, but you pay taxes on your withdrawals later. Roth IRAs require you to pay taxes on your contributions upfront in exchange for tax-free withdrawals in retirement.
Because of this, the government makes special rules regarding how much you can save in one of these accounts each year. In 2025, adults under 50 may set aside up to $7,000 in an IRA, while those 50 and older may save up to $8,000. There are income limits for Roth IRAs that could restrict high earners to less than this.
There are also rules limiting your IRA withdrawals. Typically, you’ll pay a 10% early withdrawal penalty if you take money out of your account before age 59 1/2 without a qualifying reason, like:
- Giving birth to or adopting a child (up to $5,000 per child)
- Becoming totally and permanently disabled
- Sustaining an economic loss from a federally declared disaster (up to $22,000)
- Being a victim of domestic abuse (up to the lesser of $10,000 or 50% of the account balance)
- Paying for qualified higher education expenses
- Paying for an emergency (up to the lesser of $1,000 or your vested account balance over $1,000, limit once per calendar year)
- Taking Substantially Equal Periodic Payments (SEPPs)
- Buying your first home (up to $10,000)
- Paying for medical expenses in excess of 7.5% of your adjusted gross income (AGI)
- Being a military reservist called to active duty
- Paying for health insurance premiums while you’re unemployed
If you take money out of a traditional IRA without checking one of these boxes, you’ll pay ordinary income tax on the withdrawn money, plus the 10% penalty. Not to mention, you’re setting your retirement savings way back. You’ll need to save more money going forward in order to retire with the same amount you would have had if you hadn’t taken the early distribution.
If you have a Roth IRA, the rules are a bit more complicated. Roth IRAs permit you to withdraw your contributions tax- and penalty-free at any age, because you already paid taxes on them. For earnings to be tax- and penalty-free, you must wait until you’re at least 59 1/2 and have had the account for at least five years.
Alternatives to early IRA withdrawals
Regardless of the consequences, an early IRA withdrawal might seem tempting when you don’t have the cash you need on hand. Before resorting to that, though, you should explore other ways to get the funds you need, like:
- Save up over time: This strategy may be your best option if you don’t need the money right away.
- Work out a payment plan: If you owe a creditor, see if you can arrange a payment plan so you don’t have to come up with a lump sum.
- Take out a loan: You may be able to borrow money and pay it back in installments over time. Personal loans let you use the funds for any legal purpose.
- Consider a 401(k) loan: 401(k)s sometimes enable you to take out loans that you pay back with interest over time. This helps you avoid the 10% early withdrawal penalty while potentially harming your retirement savings less.
It’s worth exploring all the options available to you before you make a ruling on which one is right for you. You may still decide to take money out of your IRA. In that case, only withdraw what you need, and consider speaking with an accountant to learn how this might affect your tax bill.
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