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Checklist: Exceptions to the 10% Penalty on Pre-Age 59½ Retirement Plan Distributions

If you are under age 59½ and take a distribution from your 401(k) plan, IRA, or similar tax-favored retirement account, that distribution is subject to an extra 10% tax (often referred to as a “penalty,” though it’s not that—it’s just an “additional tax”) in addition to regular income tax. The purpose of this tax under Section 72(t) of the Internal Revenue Code is to discourage “premature distributions”—the government wants you to keep that money safe for retirement.

But wait—the Tax Code provides 16 exceptions to the 10% tax! If you want or need to withdraw money prior to age 59½ surely you can fit into one of them? Unfortunately, it’s not that easy. Some exceptions apply only to IRAs, others only to 401(k), and other “qualified” employer-sponsored plans. Some have a dollar limit. All have narrow definitions.

Here is the complete list of exceptions to the 10% penalty. If you are under age 59½ and considering withdrawing from your retirement account, use this list as a starting point for discussions with your advisor about whether you can qualify for an exception to the 10% penalty. Citations are provided to get you started on filling in the details for an exception you might want to use; see the end of this article for best sources of complete information on the exceptions.

  1. Return of aftertax money. This “exception” rarely provides much shelter, but for what it’s worth: The 10% tax applies only to the portion of a distribution includible in income—it does not apply, for example, to the portion of a distribution that represents return of the taxpayer’s own aftertax contributions. Section 72(t)(1).
  2. Death benefits. Withdrawals from an inherited plan or IRA are not subject to this tax, regardless of the age of the decedent or the beneficiary. So if, for example, you hold an IRA you inherited from your mother in addition to your own IRA, withdrawals from the inherited IRA will not be subject to the 10% tax. Section 72(t)(2)(A)(ii).
  3. Disability. Distributions “attributable to” disability are not subject to the tax. Section 72(t)(2)(A)(iii). Disability is defined in Section 72(m)(7). In summary, a person is disabled if permanently unable to work due to a mental or physical impairment.
  4. Retirement at age 55 or later. If you leave your employment after attaining age 55, withdrawals from your former employer’s plan are penalty-free, even while you are under 59½. Section 72(t)(2)(A)(v). This is not as helpful as it looks. First, it does not apply to IRAs at all—even an IRA into which you “roll” distributions from your former employer’s plan. Second, if you separated from service before age 55, you can’t use this exception—even after you turn 55; the separation from service has to be after age 55.
  5. Qualified dividends on ESOP stock. This one is truly rare. If your company-sponsored retirement plan is an “employee stock ownership plan,” or ESOP, which holds dividend-paying employer stock, the dividends are not subject to the 10% penalty. Section 72(t)(2)(A)(vi).
  6. IRS levy. This is not an exception you want to qualify for. If the IRS levies on your account (creating a forced distribution), the distribution is not subject to the 10% tax. Section 72(t)(2)(A)(vii).
  7. Certain phased annuities. Also exempt are “payments under a phased retirement annuity under section 8366a(a)(5) or 8412a(a)(5) of title 5, United States Code, or a composite retirement annuity under section 8366a(a)(1) or 8412a(a)(1) of such title.” Section 72(t)(2)(A)(viii). I have no idea what this refers to.
  8. Deductible medical expenses. Medical expenses can be taken as an “itemized deduction” on your income tax return to the extent such expenses exceed 7.5% of your adjusted gross income. Whatever that deductible amount is, you can withdraw from your retirement account penalty-free. The withdrawal must be in the same year the expenses are incurred, even though you won’t know exactly what your AGI is going to be until you prepare your tax return after the end of the year. And of course the withdrawal itself increases your AGI, which reduces the amount of deductible expenses! Section 72(t)(2)(B).
  9. QDRO payments. A QDRO (pronounced KWAD-roe) is a court order dividing an employer-qualified plan benefit between divorcing spouses. Payments to an ex-spouse under a QDRO are penalty-free. Section 72(t)(2)(C). This exception does not apply to IRAs, even though those can be divided between divorcing spouses just like qualified plan benefits can be.
  10. IRAs only: Health insurance premiums for the unemployed. If an IRA owner receives unemployment insurance for 12 consecutive weeks, he can withdraw from his IRA, penalty-free, the amount of his health insurance premiums. He cannot withdraw penalty-free to pay for food or gas or the mortgage on the family home; just health insurance premiums. Section 72(t)(2)(D).
  11. IRAs only: Higher education costs. An IRA owner can withdraw, penalty-free, amounts up to the amount of expenses incurred in that year for higher education of himself, his spouse, his children, or his grandchildren. Section 72(t)(2)(E). I want to meet that individual under age 59½ who has college-age grandchildren! Unfortunately, repaying education loans is not considered an education expense for purposes of this exception.
  12. IRAs only: First-time homebuyer. The good news: An IRA owner can withdraw money penalty-free, one time, for purchase of a first home for himself, his spouse, his descendants, or their “ancestors.” Section 72(t)(2)(F). The bad news: The maximum penalty-free withdrawal is $10,000 (per IRA owner, not per home). This is only for a “principal residence.”
  13. Qualified reservist distributions. Congress patriotically responded to the terrorist attacks of 9/11/2001 by allowing reservists who were called up to active duty to withdraw from IRAs and some other plans without being subject to the 10% tax. Section 72(t)(2)(G).
  14. Qualified birth or adoption distributions. Section 72(t)(2)(H). This is a distribution within one year after the birth of a child to (or adoption of a child by) the recipient. There is no requirement that the distribution be related to any specific expenses connected with the birth or adoption. The maximum distribution that is free of the 10% tax is $5,000 (per child apparently). Subject to various restrictions, the distribution can later be repaid to the plan.
  15. Victims of certain disasters. When a destructive hurricane or similar disaster strikes a large area or population, Congress sometimes reacts by enacting various forms of disaster relief, often including token bits of tax relief, one form of which is suspending application of the 10% tax for “qualified disaster distributions.” This is one topic where the IRS website ( is the best place to start looking because individual legislation may be harder to locate. Search the IRS site for the name of your disaster, and see IRS Form 8915A (“Qualified Disaster Retirement Plan Distributions and Repayments”) and IRS Publication 976 (“Disaster Relief”). Unfortunately, this exception helps only those who suffered in a disaster large enough to gain attention in Washington. If it’s just your own house that got washed away in the flood or flattened by a tornado, you’re out of luck.
  16. The biggest and best exception: A SOSEPP. The penalty does not apply to payments that are “part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary.” Section 72(t)(2)(A)(iv). This exception allows any IRA owner to construct a “series of substantially equal periodic payments,” or SOSEPP, from his/her IRA that will be penalty-free. Though constructed as a lifelong installment or annuity payout, the payments don’t actually have to last for life—they can be discontinued once the IRA owner reaches age 59½. The series is constructed using the life expectancy from the new IRS actuarial tables and an interest rate of up to 5% (or up to 120% of the federal midterm rate if higher). See IRS Notice 2022-6. The big catch is, the payments MUST be continued to age 59½ (or for at least five years, whichever is longer)—otherwise all payments made under the series become retroactively subject to the penalty. The SOSEPP can be used for an employer plan (non-IRA plan) only after the employee has separated from service. You need an accountant or other “numbers person” to figure out the proper amount of the series payments, but no question the SOSEPP offers the best penalty-free way to access IRA money before age 59½ if you can get payments the right size to fit your needs.

Notice there’s one type of distribution you would expect to be penalty-free but isn’t: A “hardship distribution” from a 401(k) plan. Generally 401(k) benefits cannot be distributed at all until after the employee has separated from service of the employer or attained age 59½. One exception to that rule is for distributions in case of “hardship,” defined as a situation involving an “immediate and heavy financial need.” So the employee can take a distribution from the 401(k) plan in that case—but it will be subject to the 10% penalty unless it qualifies for one of the exceptions listed above! This is a true case of Congress/Tax Code “gotcha!”

Reminder: The list above gives just brief summaries of the various exceptions. Do not plunge into claiming an exemption based on this summary list. Each exception is surrounded by rules and conditions. Citations are provided so you and your advisor can go to the source and verify the details. Do not rely on IRS publications—they can be prone to errors and/or incomplete. A highly recommended secondary source is The 2022 Pension Answer Book by Stephen J. Krass (Wolters Kluwer; https://law‑ (Chapter 16). See also Chapter 9 of my book, Life and Death Planning for Retirement Benefits (9th ed. 2019).

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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