November 21, 2019
Early Withdrawals from Individual Retirement Accounts
(IRAs) and 401(k) Plans
Background
Qualified distributions, which include earnings on
Congress created incentives for certain individuals to save
contributions, are those that occur after the account is at
for retirement through Individual Retirement Accounts
least five years old and are (1) made after an account owner
(IRAs) and 401(k)s. Employees (and sometimes employers
turns 59½, (2) made after an account owner becomes
in the case of 401(k) plans) contribute funds to a tax-
disabled, (3) made to a beneficiary after an account owner’s
advantaged account, which can then be used as an income
death, or (4) used for a first-time home purchase. Qualified
source in retirement. To discourage account owners from
distributions are not subject to income tax or the 10%
withdrawing funds before retirement, the Internal Revenue
penalty.
Code (IRC) generally imposes a 10% penalty (in addition to
applicable income taxes) on early withdrawals, which are
Nonqualified distributions are those that do not meet the
withdrawals that occur before an individual reaches age
qualified distribution guidelines and are subject to a 10%
59½.
penalty unless an exception applies. The taxable portion of
any nonqualified distribution (e.g., earnings on
Individuals who make early withdrawals are subject to rules
contributions) may be included in taxable income.
that vary by plan type, the circumstance warranting a
Conversions—rollovers from a traditional IRA to a Roth
withdrawal, and plan-specific rules. IRAs generally have
IRA—that have not met a separate five-year requirement
fewer restrictions on early withdrawals than do 401(k)s. For
are considered nonqualified distributions and are subject to
example, individuals may withdraw funds, but generally
the penalty. Conversions and rollovers from other Roth
with a penalty, from an IRA for any reason, but
IRAs are not included in taxable income.
withdrawals from 401(k)s (1) must be allowed by the plan
and (2) may be an in-service distribution (i.e., a distribution
401(k) Plans
while an employee is still working) or a hardship
A 401(k) is an employer-sponsored retirement savings plan
distribution (i.e., for an employee’s hardship reason).
in which participants have individual accounts. Employee
contributions are excluded from taxable income (up to a
Individual Retirement Accounts
contribution limit), but withdrawals are included in taxable
IRAs are tax-advantaged savings accounts for individuals
income. Some 401(k) plans include an employer match, in
or married couples. IRAs are funded by three sources: the
which employers contribute to an employee’s account
individual’s contributions, rollovers (i.e., transfers), and
based on the employee’s contribution levels.
earnings. Traditional IRA contributions can be tax
deductible, but withdrawals are generally included in
Plans are required to distribute vested benefits—those that
taxable income. Roth IRA contributions are not tax
are owed to an employee based on plan rules—upon certain
deductible, but qualified distributions (defined below) are
distributable events, such as an employee’s death,
not included in taxable income. Both types allow account
disability, retirement, or separation from service.
owners to withdraw funds at any time, but they have
Retirement age varies by plan but typically ranges from age
distinct rules governing early withdrawals.
62 to age 65. Employees may also receive distributions
upon a plan’s termination.
Early Withdrawals from Traditional IRAs
Early withdrawals from traditional IRAs—those occurring
Employees under 55 years of age who separate from an
before age 59½—are subject to a 10% penalty unless an
employer and take a distribution instead of keeping the
exception described below applies. The withdrawal amount
balance in the plan or rolling it over to a new employer plan
is also included in taxable income.
or an IRA face a 10% penalty.
Early Withdrawals from Roth IRAs
Plans may allow (1) in-service distributions and (2)
Roth IRA distributions (i.e., withdrawals) are characterized
hardship distributions. In both cases, if the account owner
as (1) returns of regular contributions, (2) qualified
has not reached age 59½, distributions are included in
distributions, and (3) nonqualified distributions. Each is
taxable income and are subject to a 10% penalty unless an
subject to distinct withdrawal rules.
exception described below applies. Plan documents specify
whether these features are available and, in the case of a
Returns of regular contributions, which are withdrawals
hardship distribution, the requirements to demonstrate one.
of original contributions, are neither included in taxable
income nor subject to the 10% penalty.
In addition, plans may allow participants to borrow (i.e., in
the form of loans) from their accounts. Loans are not early
withdrawals except in the case of default. If default occurs,
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Early Withdrawals from Individual Retirement Accounts (IRAs) and 401(k) Plans
the outstanding balance is included in taxable income and
Exceptions for IRAs Only
subject to a 10% penalty if the account owner is younger
Exempt from the penalty are IRA withdrawals used to pay
than age 59½.
health insurance premiums while unemployed, withdrawals
of up to $10,000 for first-time homebuyers, and
In-Service Distributions
withdrawals used to pay qualified higher education
If plans allow employees who are currently working for the
expenses. Returned IRA contributions—contributions made
employer sponsoring the plan to take in-service
and then withdrawn within the same year (or by an
distributions, employees generally must satisfy an age
extended due date)—qualify for a penalty exception, though
requirement (typically 59½ or older) and a length-of-
earnings on these contributions do not.
employment requirement.
Exceptions for 401(k) Plans Only
Hardship Distributions
Exempt from the penalty are 401(k) withdrawals used for
Plans may allow distributions for employees who face an
payments under a qualified domestic relations order, a
immediate and heavy financial need. Amounts withdrawn
dividend pass-through from an Employee Stock Ownership
must satisfy the financial need and may include amounts
Plan, and corrective distributions (and associated earnings)
necessary to pay taxes or penalties on the distribution.
of excess contributions and deferrals. As previously
Hardship distributions are not considered necessary if an
mentioned, employees who separate from the employer
employee has other resources to meet the need.
sponsoring their plan during or after the year the employee
reaches age 55 do not face the 10% penalty.
Plans vary in defining which situations qualify for a
hardship distribution. Regulations automatically deem
Other Retirement Plans
certain expenses to be made on account of immediate and
Savings Incentive Match Plans for Employees (SIMPLE)
heavy financial need (26 C.F.R §1.401[k]-1[d][3][B]).
IRAs and Salary Reduction Simplified Employee Pension
These expenses include, among others, first-home purchase
Plans (SARSEPs), types of IRA-based employer-sponsored
costs (excluding mortgage payments), certain
plans, include an exception to the penalty for permissive
postsecondary tuition expenses, certain medical expenses,
withdrawals from plans with automatic enrollment features.
payments to prevent eviction or foreclosure, and expenses
SIMPLE IRA distributions face a 25% early withdrawal
related to damages from a federally-declared disaster.
penalty if made within the first two years of participation.
Hardship distributions to employees younger than age 59½
Otherwise, IRA-based plans generally follow the same
are not exempt from the 10% penalty unless an exception
early withdrawal rules as IRAs.
applies.
Other employer-sponsored retirement plans, such as 403(b)
Recent Legislative Changes to Hardship Distributions
plans and the federal government’s Thrift Savings Plan,
Prior to 2019, participants were unable to (1) make
generally follow the same early withdrawal and penalty
contributions for a six-month period following a hardship
exception rules as 401(k)s, whereas 457(b) plans allow
distribution or (2) take a hardship distribution before
participants to take distributions in certain situations akin to
requesting a plan loan. Sections 41113 and 41114 of the
hardship distributions described as unforeseeable
Bipartisan Budget Act of 2018 (P.L. 115-123) eliminated
emergencies (26 C.F.R. §1.457-6).
these requirements. P.L. 115-123 also expanded the types
of contributions and earnings that can be received as
For Additional Information
hardship distributions to include employee contributions,
CRS Report 98-810, Federal Employees’ Retirement
qualified nonelective and matching contributions, and
System: Benefits and Financing.
related earnings.
Exceptions to the 10% Penalty
Internal Revenue Service, Hardships, Early
Withdrawals and Loans, at https://www.irs.gov/
Exceptions to the 10% penalty for certain expenses are in
retirement-plans/hardships-early-withdrawals-and-loans.
26 U.S.C. 72(t). Some of these exceptions apply to both
types of plans, whereas others apply only to qualified
Internal Revenue Service, IRS Publication 590-B
employer plans, such as 401(k)s, or to IRAs.
(2018), at https://www.irs.gov/pub/irs-pdf/p590b.pdf.
Exceptions for IRAs and 401(k) Plans
Internal Revenue Service, Retirement Topics –
Exempt from the penalty are withdrawals that occur after an
Exceptions to Tax on Early Distributions, at
account owner reaches age 59½, dies, or becomes disabled.
https://www.irs.gov/retirement-plans/plan-participant-
Also exempt are substantially equal periodic payments (i.e.,
employee/retirement-topics-tax-on-early-distributions.
regular distributions for individuals under age 59½ that are
based on IRS formulas), withdrawals to pay an IRS levy,
and withdrawals for unreimbursed medical expenses in
Elizabeth A. Myers, Analyst in Income Security
excess of 7.5% of adjusted gross income) (10% if under age
IF11369
65). Other exemptions include rollovers and certain
distributions for qualified military reservists.
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Early Withdrawals from Individual Retirement Accounts (IRAs) and 401(k) Plans
Disclaimer
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https://crsreports.congress.gov | IF11369 · VERSION 4 · NEW