Withdrawal Penalty
Candlefocus EditorThe IRS considers any withdrawal from a retirement account before age 59 1/2 to be an “early withdrawal,” which is subject to a penalty tax. The penalty tax is equal to ten percent of the withdrawal amount. In addition to the penalty tax, all earnings on the withdrawal amount are also taxed at the taxpayers' marginal tax rate. This means that an early withdrawal could end up costing the taxpayer up to 39.6% of the withdrawal amount.
There are, however, a few exceptions to the withdrawal penalty. The IRS allows for early withdrawal without penalty in cases of death, disability, and financial hardship. In addition, the IRS allows for penalty-free withdrawals for qualified tuition expenses and up to $10,000 for first-time home buyers. Furthermore, the IRS allows for penalty-free distributions from an IRA after age 59 1/2, and the IRS generally does not assess a penalty tax unless the withdrawal is more than $50,000.
The withdrawal penalty from retirement accounts can be expensive and is designed to discourage people from using their retirement savings for things other than retirement. It is important to plan ahead when considering withdrawals from retirement accounts in order to avoid any penalties, and to also understand how withdrawals could impact your retirement savings and long-term financial objectives. As with all major financial decisions, it is always best to consult with a financial professional before taking withdrawals in order to understand all of the potential impacts to your retirement and financial goals.