People in their 50s and early 60s are the ones who get hit with the early withdrawal penalty most often. A layoff, a health problem, a divorce, a parent who needs care. The money is in the 401(k) or IRA, and the need is now.
The tax is avoidable more often than people think. But only if you know which exception you are using, whether it applies to the type of account you are drawing from, and how to tell the IRS about it.
What the tax is
IRC 72(t)(1) adds a tax equal to 10 percent of the portion of a distribution that is includible in gross income, when the distribution comes from a "qualified retirement plan" as defined in section 4974(c). That definition covers 401(a) plans such as 401(k)s, 403(a) and 403(b) annuities, and IRAs. It is technically an additional tax, not a penalty, which matters for one reason: penalty abatement tools such as first-time abatement do not remove it. You either fit an exception or you owe it.
It applies only to the taxable portion. Roth IRA contributions you take back, or after-tax basis in a traditional IRA, are not hit. For a SIMPLE IRA, distributions in the first two years of participation can face 25 percent instead of 10, under 72(t)(6).
Exceptions that apply to both IRAs and employer plans
| Exception | Code section | Notes |
|---|---|---|
| Age 59 and a half | 72(t)(2)(A)(i) | On or after the date you reach 59 and a half |
| Death | 72(t)(2)(A)(ii) | Distributions to a beneficiary or estate |
| Disability | 72(t)(2)(A)(iii) | Defined strictly in 72(m)(7): unable to engage in substantial gainful activity, expected to be long-continued or fatal |
| Substantially equal periodic payments | 72(t)(2)(A)(iv) | Strict rules; see the SEPP guide |
| IRS levy | 72(t)(2)(A)(vii) | Only an actual levy on the account |
| Unreimbursed medical expenses | 72(t)(2)(B) | To the extent deductible under section 213, above 7.5% of AGI, whether or not you itemize |
| Birth or adoption | 72(t)(2)(H) | Up to $5,000 per child |
| Emergency personal expense | 72(t)(2)(I) | One per year, up to $1,000; after 2023 |
| Domestic abuse victim | 72(t)(2)(K) | Lesser of a dollar cap ($10,500 for 2026) or 50% of the account |
| Terminal illness | 72(t)(2)(L) | Physician certification; illness reasonably expected to result in death within 84 months |
| Qualified disaster recovery | 72(t)(2)(M) | Up to $22,000 for federally declared disasters, with conditions |
Exceptions that apply only to employer plans
- Separation from service at 55 or older, under 72(t)(2)(A)(v), or age 50 for certain public safety employees under 72(t)(10). Section 72(t)(3)(A) says this exception does not apply to IRAs. See the rule of 55.
- Payments to an alternate payee under a qualified domestic relations order, under 72(t)(2)(C).
Exceptions that apply only to IRAs
- Health insurance premiums while unemployed, under 72(t)(2)(D), if you received unemployment compensation for 12 consecutive weeks. It stops applying once you have been reemployed for 60 days.
- Qualified higher education expenses, under 72(t)(2)(E).
- First-time homebuyer distributions up to $10,000, under 72(t)(2)(F).
This is where people get tripped up. Someone who leaves a job at 56, rolls the 401(k) to an IRA, then takes money out has lost the rule of 55. Someone who pays college tuition from a 401(k) instead of an IRA does not get the education exception. The account type matters as much as the reason.
What is not an exception
- Paying the IRS. Unless the IRS actually levies the account. See the levy exception.
- Hardship withdrawals from a 401(k). The plan may allow a hardship distribution, but plan permission is not a tax exception. The 10 percent still applies unless something on the lists above fits.
- Financial hardship generally, job loss by itself, or paying off debt.
- Medical expenses below the 7.5 percent floor. Only the excess counts.
How the IRS learns about it
The payer reports the distribution on Form 1099-R. Box 7 carries a distribution code. Code 1 means early distribution, no known exception. Code 2 means early distribution, exception applies. Code 7 is a normal distribution. The IRS matches your return against that form.
Many valid exceptions are invisible to the payer. Your IRA custodian does not know about your medical bills or your tuition payments. It will often use code 1, and if you do nothing, the IRS's matching program will assume you owe the 10 percent and propose it in a notice. The codes and their effects are covered in Form 1099-R distribution codes that trigger IRS notices.
Claiming the exception on Form 5329
Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is where you claim an exception the 1099-R does not show. In Part I, you report the early distributions, enter the amount not subject to the additional tax, and use the exception number from the form instructions that matches your situation. Attach it to your Form 1040.
Keep the support. If you claim the medical exception, keep the bills and your AGI calculation. If you claim disability, keep the medical documentation. If you claim the emergency expense exception, keep a record of what the expense was, even though the law lets you self-certify.
The disability exception is narrower than people think
Section 72(m)(7) defines disabled as unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration. That is a high bar. Being unable to do your old job is not enough if you could do other work. An SSDI award is strong supporting evidence, but the tax test is applied on its own terms. If you claim it, keep a physician's statement describing the condition and its expected duration.
Distributions after disability are reported by the payer with code 3 if the payer knows. Most IRA custodians will not know unless you tell them and provide documentation, so expect code 1 and plan to file Form 5329.
Repayment options
A few of the newer exceptions allow you to put the money back. The birth or adoption exception and the emergency personal expense exception permit repayment within the limits set by statute, and repayment is treated like a rollover. For the emergency exception, the law also restricts taking another emergency distribution within the following three years unless the first is repaid or replaced by new contributions. Read the rules for the specific exception before you rely on repayment.
If you already received a notice
If the IRS proposed the 10 percent on a distribution that qualified for an exception, respond by the deadline on the notice with a signed explanation, the completed Form 5329 if you did not file one, and your documents. If the response window passed and the tax was assessed, audit reconsideration or a claim for refund can still correct it within the time limits. Do not just pay it because the letter looks official.
If the tax is valid and you cannot pay it, the usual collection options apply. See installment agreements in Pinellas County.
Next step
Before you withdraw, identify the exception you are relying on and confirm it applies to the account you are drawing from. After you withdraw, make sure the return tells the IRS why the 10 percent does not apply. If you are dealing with a notice already, call (813) 229-7100. The firm's page on tax planning covers how to plan withdrawals before they become problems.
Questions people ask
Does a 401(k) hardship withdrawal avoid the 10 percent penalty?
No. A plan may allow a hardship distribution, but that does not create a tax exception. The 10 percent additional tax applies unless the distribution fits one of the exceptions in IRC 72(t)(2).
Can I use the rule of 55 with my IRA?
No. IRC 72(t)(3)(A) says the separation from service exception does not apply to IRAs. It applies only to distributions from the employer plan of the job you left.
My 1099-R shows code 1 but I qualify for an exception. What do I do?
Claim the exception on Form 5329, using the exception number from the form instructions, and attach it to your return. Keep documentation supporting the exception.
Can first-time abatement remove the 10 percent early withdrawal tax?
No. The IRC 72(t) amount is an additional tax, not a penalty eligible for first-time abatement. You must fit a statutory exception.
General information, not legal advice. Reading this page does not create an attorney-client relationship. Tax rules and dollar thresholds change; confirm the current figures for your tax year before acting.