By Dr. James M. Dahle, WCI Founder

The 10% early withdrawal penalty (sometimes called the age 59 1/2 rule) is designed to encourage investors to leave the money in their retirement accounts so that there is actually something in there when it comes time to retire. It is one of the prices that must be paid to reap the substantial tax, investing, estate planning, and asset protection benefits of tax-protected (including tax-deferred/traditional and tax-free/Roth) accounts. However, in an effort to not discourage retirement saving, the government allows many exceptions to these rules, and the 2022 Secure Act 2.0 expanded the list.


What Is the 10% Early Withdrawal Penalty?

The IRS charges a 10% penalty (in addition to any tax due) for early withdrawals from retirement accounts for which there is no valid exception. The 10% penalty applies to anyone taking money out of annuities, IRAs, SEP-IRAs, SIMPLE IRAs, SIMPLE 401(k)s, and their Roth equivalents before age 59 1/2. It also applies to anyone taking money out of 401(k)s, 403(b)s, and their Roth equivalents before age 55 and separation from the employer (or age 59 1/2 and no separation).

Thus, one great way for a mid to late 50s retiree to beat the age 59 1/2 rule is to NOT roll money out of a 401(k) or 403(b) until age 59 1/2. 457(b)s do not have early withdrawal penalties (and, thus, are often the first money spent in retirement). Health Savings Accounts (HSAs) have an age 65 rule before penalty-free withdrawals for non-healthcare expenses are permitted. Note that the HSA early withdrawal penalty is 20%, and the exceptions discussed in this post do not apply to HSAs. There is also a 10% penalty on 529 withdrawals not used for valid educational expenses. These exceptions do not apply to that penalty either. Taxable brokerage accounts, of course, provide complete flexibility but do not enjoy any of the benefits of tax-protected accounts.

More information here:

The 2023 Retirement Plan Contribution Limits


Exceptions to the 10% Early Withdrawal Penalty

There are a plethora of exceptions to this penalty. Let's go over them all and hope Congress continues to add more.


Roth Contributions

Contributions to Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth SEP-IRAs, Roth SIMPLE IRAs, and Roth SIMPLE 401(k)s can be withdrawn tax-free (and penalty-free) at any time.


Roth IRA Conversions

If Roth principal came not from a direct contribution but from a Roth conversion (like with the Backdoor Roth IRA process or the Mega Backdoor Roth IRA process), you can withdraw it penalty-free starting in the fifth year after conversion. (If you converted in 2020, you can tap the principal penalty-free starting on January 1, 2025).


Early Retirement

The 72(t) or Substantially Equal Periodic Payments (SEPP) rule allows early retirees to withdraw an actuarially reasonable amount of their retirement accounts at any age penalty-free as long as the withdrawals continue until the later of five years or age 59 1/2.


Unreimbursed Medical Expenses

Unreimbursed medical expenses > 7.5% of your adjusted gross income (which may not be that high if you're no longer working) can be withdrawn from a retirement account without penalty.


Medical Insurance Premiums

You can pay for medical insurance premiums while unemployed using retirement account money without paying any penalties. Police officers can pay up to $3,000 in premiums even if employed. Thanks to the Secure Act 2.0 and starting in 2022, those police payments do not even have to be made directly.



If you die, your heirs can withdraw from your account (now an inherited IRA) without penalty. Note that if your spouse elects to roll your account into their own account, a penalty could apply.



If you become permanently disabled, you can withdraw from your retirement account without penalty.


Qualified Higher Education Expenses

You can use retirement account money to pay for your own education, that of your children, or that of your grandchildren without penalty.


A First Home

You can also use up to $10,000 of retirement account money ($10,000 of earnings for Roth accounts) for the purchase of a new home for you, your children, or your grandchildren as often as once every two years without paying the 10% penalty.


New Child (Including Adoption)

Starting in 2020, if you have a child or adopt a child, you can withdraw up to $5,000 from a retirement account penalty-free.


IRS Levy

If the IRS places a levy on you, you can use retirement account money to satisfy it without penalty.


Reservist Distribution

A reservist called to active duty for at least 180 days can withdraw money penalty-free as well.


Hardship Withdrawals

Hardship withdrawals became much more common during the COVID pandemic. The Secure Act 2.0 allows investors to self-certify their own hardship. It also made permanent the ability to withdraw up to $1,000 from a retirement plan once per year without penalty. You can even pay it back into the plan once you recover from the hardship. If you choose not to, you cannot take out another withdrawal for three years.


Firefighter Exception

The age 55 rule is the age 50 rule for firefighters. Thanks to the Secure Act 2.0, that applies to private firefighters, too.


Police and Corrections Officer Exception

Thanks to the Secure Act 2.0, police and corrections officers can now benefit from the age 50 rule. In fact, they don't even have to wait until age 50 if they've put in 25 years of service.


Domestic Abuse

Thanks to the Secure Act 2.0 and starting in 2024, victims of domestic abuse can withdraw the lesser of $10,000 or 50% of the balance and repay it for up to three years (with a refund of any taxes paid on the withdrawal).


Terminal Illness

Thanks to the Secure Act 2.0 and starting in 2022, terminal illness is now another valid exception to the 10% early withdrawal penalty. Terminal illness is a pretty vague term (we're all terminal, really), but I presume a stricter definition will be forthcoming soon. Otherwise, the current definition seems to be “a medical condition that is untreatable and expected to result in death.” I assume you'll need a doctor besides yourself to sign off on that.


Natural Disaster

Thanks to the Secure Act 2.0 and starting on January 26, 2021 (retroactive), if you are the victim of a natural disaster, you can withdraw up to $22,000 from your retirement accounts without penalty and spread the taxes due out over three years. You can pay the money back into your retirement account, too (and get a refund on the taxes paid). You can also repay any money you took out of retirement accounts to buy a first home if you are the victim of a disaster.

avoiding 10% withdrawal penalty


Long-Term Care Insurance Premiums

Thanks to the Secure Act 2.0 and starting in 2026, you can withdraw up to $2,500 per year to pay long-term care insurance premiums without paying the 10% penalty.

More information here:

Comparing 14 Types of Retirement Accounts



Given all of these exceptions, there is likely to be something that you are doing with your money (or that your kids or grandkids are doing with their money) that qualifies as an exception. Money is fungible, and anyone can gift anyone else up to $17,000 per year tax-free (an increase from $16,000 in 2022) without filing a gift tax return. So, if your kid gives you $10,000 to spend and you use $10,000 in your retirement account to pay for that kid's new house, there is no 10% penalty.

Or maybe your grandkid is in college. Now, your kid can give you (and your spouse) $17,000 each and you can use $34,000 from your retirement account for that grandkid's tuition.

Likewise, say you paid out of pocket for long-term care premiums and some health insurance premiums while you were unemployed earlier this year but now want to pull some more money out of your retirement account to buy a little boat. No problem. You can justify a withdrawal up to the amount of the valid exceptions.

Money is fungible, and creativity may open a path you may not have considered.


As you can see, there are a plethora of exceptions to the 10% early withdrawal penalty. There are so many that it should not be a particularly useful excuse to save for retirement outside of a retirement account. Even for an early retiree.

What do you think? Which exceptions have you or will you take advantage of? Does the Secure Act 2.0 help you in this regard? What other creative ways have you thought of to take advantage of these exceptions? Comment below!