What is the penalty for early withdrawals from an IRA or qualified retirement plan?

When individuals withdraw funds from an Individual Retirement Account (IRA) or a qualified retirement plan before reaching the age of 59½, they typically face a penalty of 10% on the amount withdrawn. This penalty is designed to discourage early withdrawals and encourage individuals to save for retirement. The penalty applies to the taxable portion of the distribution, meaning that if the withdrawal includes contributions that have already been taxed, those contributions are not subject to the penalty.

In addition to the 10% early withdrawal penalty, the distribution may also be subject to regular income tax. However, there are certain exceptions where the penalty might be waived, such as in cases of permanent disability or qualified first-time home purchases.

Understanding this penalty is critical for individuals planning their retirement income strategies, as it influences their decisions regarding when to access their retirement savings.