US retirement planning – can I take early distributions and what are the penalties?

US Retirement rules generally permit penalty-free withdrawals from age 59 ½. A 10% penalty applies in addition to any taxes owed for early distributions before age 59 ½ that do not meet specific exemption criteria. This article explains the rules around early distributions and strategies to consider.

Generally, it is not recommended to take early distributions from your retirement nest egg simply because these funds are meant to provide lifetime retirement income. That said, the COVID-19 pandemic has produced unforeseen financial impacts on millions of people worldwide, and drawing from US retirement assets may be the last resort necessity. Below is a chart detailing the exceptions to the 10% early withdrawal penalty for the two most common US plan types – Individual Retirement Accounts (“IRA”) (all IRA types including traditional, Roth, and Self Employed) & 401(k) and other employer sponsor plans:

Exemptions to the 10% Early Withdrawal Penalty

Individual Retirement Accounts (IRA's)

Employer-Sponsored Plans / 401(k)’s

Higher education expenses



Medical expenses

Distributions for health insurance premiums (unemployed individuals)

First-time home purchase ($10,000 limit)

Adoption finalized or baby born ($5,000 limit)

Withdrawals permitted from age 55

An alternate payee under a qualified domestic relations order

The above chart highlights critical differences between permitted early withdrawals from IRA’s and Employer-Sponsored Plans such as 401(k)’s. IRA plans offer distinct advantages, enabling early withdrawals for higher education expenses, health insurance premiums for the unemployed, and first-time home purchases ($10k limit). Conversely, a 401(k) plan provides distinct advantages such as allowing penalty-free withdrawals from age 55 and greater flexibility with Qualified Domestic Relations Order payments standard in divorce settlements.


A SEPP payment strategy offers penalty-free withdrawals through specified annual distributions for five years or until the account-holder turns 59½, whichever comes later. A SEPP is available to all IRA’s & Employer-Sponsored Plans, regardless of personal circumstances. Payments are calculated according to three different IRS-approved methods, and the 5-year payment schedule must follow one of these three methods. Failure to adhere to the rules may subject the entire sum of SEPPs to the 10% early withdrawal penalty and additional interest.

401(k) Plan Loans

One advantage many (not all) 401(k) plans offer is the ability to take a loan from your plan balance. The loan amount customarily permitted is the greater of $10,000 or 50% of your vested account balance, or $50,000, whichever is less. Notably, loans are not taxed as long as the required repayments are made until the entire balance is repaid. Most plans charge fees and interest to provide loans, so please make sure you understand the terms and conditions of the loan the plan offers. Should you fall short of repaying the whole balance owed, the unpaid balance is fully taxed and charged the 10% early withdrawal penalty if you are younger than age 59½. Conversely, IRA plans do not allow for loans, making loans a distinct advantage of 401(k) plans.In summary, planning the right retirement income strategy requires a detailed plan of action. Picking which plan is best for you depends on the available choices and your personal circumstances, and as fiduciaries, Brite Advisors can help you make the best advise you on your decisions. If you are interested in implementing a personalized retirement income strategy, please contact us to learn more.

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