Withdrawal Rules & Avoiding Penalties

Withdrawal Rules by Account

401(k) penalty exceptions: Separation from service at 55+, Disability, Death, Substantially equal payments (72t), Qualified domestic relations order (QDRO).

Traditional IRA penalty exceptions: First-time home purchase (up to $10,000), Disability, Death, Higher education expenses, Health insurance premiums (if unemployed), Unreimbursed medical expenses over 7.5% of AGI.

Roth IRA penalty exceptions: Contributions always withdrawable penalty-free, First-time home purchase (earnings, up to $10,000), Disability, Death.

Roth IRA Withdrawal Order

Roth IRA withdrawals follow a specific order set by the IRS — and it matters because different layers are taxed (and penalized) differently.

1. Your contributions — Always available — no taxes, no penalty, anytime.
2. Converted amounts — Tax-free, but 10% penalty if withdrawn within 5 years of conversion (unless 59½+).
3. Earnings / Growth — Tax-free and penalty-free only if account is 5+ years old AND you're 59½+.

Required Minimum Distributions (RMDs)

Starting at age 73, the IRS requires you to withdraw a minimum amount from Traditional IRAs and 401(k)s each year. The amount is calculated by dividing your prior year-end balance by an IRS life expectancy factor.

* RMD = Prior year-end balance ÷ IRS life expectancy factor. Roth IRAs have no RMDs during your lifetime.

Key Terms

• Early Withdrawal — Taking money out of a retirement account before age 59½. Generally triggers a 10% penalty on top of ordinary income taxes — with limited exceptions.
• Required Minimum Distribution (RMD) — The IRS-mandated minimum amount you must withdraw from Traditional IRAs and 401(k)s starting at age 73, calculated based on your account balance and life expectancy.
• Qualified Distribution — A Roth IRA withdrawal that is completely tax-free and penalty-free — requires the account to be at least 5 years old and the owner to be 59½ or older.
• 72(t) Distribution — A series of substantially equal periodic payments (SEPP) that allows penalty-free early withdrawals if taken in equal amounts over at least 5 years or until age 59½.