An early withdrawal penalty is a penalty incurred when withdrawing funds from a retirement account before a certain point in time.
What is an early withdrawal penalty?
Early withdrawal penalties typically apply to retirement accounts or plans, such as a Roth IRA or 401k. Often, retirement plans institute age-related rules to prevent early withdrawals. The most common example is that beneficiaries who attempt to withdraw money from their retirement plan/account before turning 59 ½ may be charged a penalty tax on the withdrawn amount. Depending on the circumstances, withdrawing funds may not be penalized, such as if the beneficiaries use the funds to pay for medical expenses.