10 Ways You Could Avoid the 10% Early Retirement Penalty

You’ve saved diligently in your 401(k), and you wouldn’t mind tapping into it – but you’re not age 59½ yet, so you could have to pay the IRS a 10% penalty on your withdrawal. There are exceptions to that rule, though. Here are 10 of them.

A soccer referee holds up a red card penalty.
(Image credit: Getty Images)

Retirement is something each of us must plan for. Not surprisingly, you want to make sure you’ll have enough income to last throughout your lifetime. Theoretically, if you plan well, you could even retire early. Perhaps you’ve sold your business for a profit, maximized your retirement account contributions, invested in non-qualified accounts, and own multiple rental properties.

In such a perfect scenario, you could take a blended distribution from various accounts and investments, allowing your money to continue to grow in tax-sensitive ways. On the other hand, taking distributions from your retirement accounts before age 59½ could cause you to owe the IRS a 10% early distribution penalty. However, there are a few conditions in which the government will waive that 10% early retirement penalty.

Before I continue, I’d like to make one thing clear. The purpose of this article is to inform you of ways you might be able to avoid the 10% income tax penalty (opens in new tab). If you take money from your qualified retirement accounts early, you will still pay ordinary income taxes on that money. You cannot avoid that.

With that out of the way, let’s take a look at some of the ways you might be able to avoid the early retirement penalty.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Justin Goodbread, CFP®, CEPA, CVGA
Chief Strategy Officer, WealthSource Partners

Justin A. Goodbread is a CERTIFIED FINANCIAL PLANNER™ practitioner and an adviser with WealthSource® Knoxville. After years of working in a large firm, he ventured out on his own in 2009, starting Heritage Investors, and eventually joining WealthSource® Partners LLC in 2022. As a serial small-business owner, Goodbread has bought and sold multiple businesses. He uses this experience, along with his continuing education, to help business owners grow and sell what is often their largest asset.