The cost of taking an early IRA withdrawal
IRAs offer tax advantages that are designed to help you save for retirement, so taking money out early can be costly. The rules depend on the type of IRA and your age. Understanding these rules can help you avoid unexpected costs and make more informed decisions about your retirement savings.
- Traditional IRA—If you take money out before age 59½, you usually owe income taxes on the taxable portion of the withdrawal, plus a 10% early withdrawal penalty. There are some exceptions, including first-time home purchases, qualified higher education expenses, and some medical expenses.
- Roth IRAs—You can withdraw the money you contributed at any time without paying taxes or penalties. But different rules apply to investment earnings. If your withdrawal doesn’t meet IRS requirements, you may owe taxes and a 10% penalty on that portion of the withdrawal.1,2
Costs of withdrawing early from a traditional IRA
While an IRA can be a valuable source of savings, early withdrawals can be more expensive than many people realize.
You’ll likely owe income taxes
No matter how old you are, some or all of an IRA withdrawal is taxable:
- Money you contributed on a pretax basis, as well as amounts rolled over from a workplace retirement plan, are generally taxable when withdrawn.
- If you made after-tax (non-deductible) contributions, part of your withdrawal may be tax-free, but only if you properly reported those contributions to the IRS and meet certain requirements. Under IRS rules, withdrawals generally include a mix of both after-tax and pretax amounts. The pretax portion and any earnings are generally subject to income tax.
You may also have to pay an early withdrawal penalty
If you're under age 59½, the part of your withdrawal that’s taxable is usually subject to a 10% early withdrawal penalty, in addition to regular income taxes. Some withdrawals qualify for an exception to the penalty, including:
- Paid out after your death or if you become disabled
- Used for qualified higher education expenses, a first-time home purchase ($10,000 lifetime limit), some unreimbursed medical expenses (that exceed 7.5% of your adjusted gross income), or health insurance premiums while unemployed
- Taken by qualified military reservists called to active duty or by certain domestic abuse victims
- Paid as a series of substantially equal payments that continue for at least five years or until you reach age 59½ (whichever comes later)
- Used for qualified birth or adoption expenses, certain personal emergency expenses, or qualified disaster recovery expenses (all subject to IRS limits)
Even if you qualify for one of these exceptions, income taxes may still apply.
The real cost of taking money out early
An early withdrawal can affect more than just your current tax bill. It can also reduce the future growth potential of your retirement savings.
Consider this example:
- Withdraw $10,000 today—You may owe federal income taxes, a 10% early withdrawal penalty, and possibly state income taxes. That means the amount you actually receive could be significantly less than $10,000.
- Keep $10,000 invested—If that money stayed in your IRA and earned a hypothetical 6% annual return, it could potentially grow to about $32,000 before taxes over 20 years. You may still owe taxes when you eventually withdraw the money, but you could potentially be in a lower tax bracket during retirement.
This is a hypothetical mathematical illustration only, and there are no guarantees that the results shown will be achieved or maintained over any period of time. Figures are based on assumptions as set out and are not indicative of any particular investment. They do not take into account fees associated with the investment. Past performance does not guarantee future results. Individual circumstances may vary.
Costs of withdrawing early from a Roth IRA
A Roth IRA works differently from a traditional IRA because you contribute money after paying taxes. Qualified withdrawals of both your contributions and earnings can be completely tax-free in retirement.1 Because of these tax advantages, the rules for taking money out early are a little more complex.
Understanding the five-year rule2
One factor that affects the taxation of Roth IRA withdrawals is how long you've had a Roth IRA. Generally, the IRS requires that at least five tax years pass from January 1 of the year when you first open and fund a Roth IRA before earnings can be withdrawn tax-free as part of a qualified distribution. For example, if you open and fund your first Roth IRA on November 25, 2026, your five-year period begins on January 1, 2026.
There’s another five-year rule that may apply if you convert money from a traditional IRA to a Roth IRA. When determining if earnings can be withdrawn tax-free as part of a qualified distribution, the five-year period still begins on January 1 of the year you first open and fund a Roth IRA. But each Roth IRA conversion also has its own five-year period for the 10% early withdrawal penalty. If you’re under age 59½ and take out the amounts you converted within five years of that conversion, the taxable portion of that conversion may be subject to the 10% early withdrawal penalty.
If you inherit a Roth IRA, you generally keep the original owner’s five-year timeline rather than starting a new one.
When you may owe taxes or penalties
Your Roth IRA is designed for tax-free withdrawals if you’re age 59½ and meet the five-year rule requirement. If you take money out before, you may owe taxes and penalties on the earnings. But certain exceptions may apply and eliminate the penalty.
