IRAs vs. 401(k)s: Exceptions to 10% Penalty for Withdrawals Under Age 59½ Differ
Before pulling money out of retirement accounts early, check the rules. The exceptions to penalties can differ depending on which type of account you’ve got.


There is a lot of confusion surrounding the 10% penalty that the IRS imposes on early distributions from retirement plans. Most people know that this penalty exists for those who withdraw tax-deferred retirement funds before age 59½, though many don’t realize it is on top of whatever your current tax rate is.
Many people also have heard that there are exceptions to the 10% penalty, though they almost never fully understand what those exceptions are and when they are applied.
Today we will explain when and where these exceptions to early withdrawal penalties are applied by breaking down distributions into three different groups: traditional IRAs, retirement plans other than IRAs, and finally a group that includes both IRAs and retirement plans.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Exceptions to 10% penalty – for IRAs only
The exceptions to the penalty for traditional IRAs are the ones most people have heard of, but they often assume they apply to any type of plan, which isn’t necessarily the case. The following exceptions are strictly limited to traditional IRAs. These exceptions don’t apply to 401(k)s, 403(b)s or other tax-deferred retirement plans:
- A first-time home purchase – up to $10,000 can be withdrawn for a down payment by a first-time homebuyer (and if your spouse also has an IRA and qualifies as a first-time homebuyer, they can withdraw up to $10,000 for the purchase as well).
- Buying health insurance – if you have lost your job and collect unemployment for at least 12 consecutive weeks.
- Paying for higher education expenses – for yourself, a spouse, kids or grandkids.
Exceptions to the 10% penalty – for 401(k)s and similar retirement plans
Qualified retirement plans, such as 401(k)s, 403(b)s, profit-sharing plans and Keogh plans, offer a few more options for avoiding the 10% early withdrawal penalty than IRAs do, including:
- Division of retirement account assets in a divorce under a Qualified Domestic Relations Order (QDRO).
- Distributions from 457(b) government plans, except for distributions attributable to rollovers from another type of plan or IRA.
- Distributions for those 50 or older for public safety employees separating from service.
- Distributions for those 55 or older in other fields who are separating from service.
- Distributions from “phased” federal plans. A phased retirement option allows employees at or near retirement age to reduce their work hours to part time, receive benefits and continue to earn additional funds.
Exceptions that apply to BOTH IRAs and 401(k)s
Some exceptions can apply to both IRAs as well as retirement plans, and they include:
- Qualified reservists – called to active duty for at least 179 days, or for an indefinite period because you are a reserve member.
- Disability – must meet the IRS definition of total and permanent disability and have documentation from a doctor.
- Death of the account owner.
- IRS tax levy – you wouldn’t owe a penalty if the IRS draws on your account to collect unpaid federal taxes. However, if you take an early withdrawal to pay a tax bill yourself, the exception does not apply and you would be hit with the 10% penalty.
- Medical expenses (to the extent they exceed 10% of your adjusted gross income).
- Adoptions or birth of a child – up to $5,000 in withdrawals can be penalty free in the first year.
- Substantially equal payments (aka the 72(t) exception). This is when you take your balance distributions over substantially equal payments. Warning, 72(t) might seem like a great idea, but I have seen countless times when this plan has gone wrong. If it is done wrong, the entire balance of the account is immediately taxable, including the10% penalty if you are under age 59½. Do not consider this option until you discuss with your CPA and adviser.
These are the majority of the exceptions, and they only apply as listed. You can’t interchange them, or you will be subject to the under age 59½ penalty.
Securities offered through Kestra Investment Services LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services or Kestra Advisory Services. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax adviser with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

T. Eric Reich, President of Reich Asset Management, LLC, is a Certified Financial Planner™ professional, holds his Certified Investment Management Analyst certification, and holds Chartered Life Underwriter® and Chartered Financial Consultant® designations.
-
Social Security Will Continue Sending Paper Checks, Reversing Course
The Social Security Administration has backed off from plans to eliminate paper checks. However, it will only send checks in the mail as a matter of last resort.
-
Ask the Editor — Tax Questions on Four New Tax Deductions
Ask the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on four new tax deductions in the "One Big Beautiful Bill."
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case Study
Susan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
From Piggy Banks to Portfolios: A Financial Planner's Guide to Talking to Your Kids About Money at Every Age
From toddlers to young adults, all kids can benefit from open conversations with their parents about spending and saving. Here's what to talk about — and when.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your Portfolio
Alternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
A Financial Planner's Guide to Unlocking the Power of a 529 Plan
529 plans are still the gold standard for saving for college, especially for affluent families, though they are most effective when combined with other financial tools for a comprehensive strategy.
-
An Investment Strategist Takes a Practical Look at Alternative Investments
Alternatives can play an important role in a portfolio by offering different exposures and goals, but investors should carefully consider their complexity, costs, taxes and liquidity. Here's an alts primer.
-
Ready to Retire? Your Five-Year Business Exit Strategy
If you're a business owner looking to sell and retire, it can take years to complete the process. Use this five-year timeline to prepare and stay on track.
-
A Financial Planner's Prescription for the Headache of Multiple Retirement Accounts
Having a bunch of retirement accounts can cause unnecessary complications. Consolidation can make it easier to manage your savings and potentially improve investment outcomes.
-
Overpaying for Financial Advice? A Financial Planner's Guide to Fees
Take five minutes to review how much you're paying for financial advice. If you're overpaying, you could be better off with an adviser who charges a flat fee.