Early Withdrawal Penalty Exceptions: 401k & IRA Rule 72t
Quick Answer
Age <59.5 withdrawal = 10% penalty + tax. Exceptions: Rule 72(t) (rigid payments), disability, education, first-time home ($10k lifetime). No penalty if disability or using 72(t) SEPP.
10% Penalty Rule
Withdraw before 59.5 = 10% penalty + ordinary income tax. Exceptions (penalty waived, tax still owed):
- Rule 72(t) SEPP: Substantially Equal Periodic Payments. Withdraw calculated amount annually for 5 years or until 59.5 (whichever longer). Must follow rigid schedule.
- Disability: Permanent disability.
- Medical: Expenses >7.5% AGI.
- Education: Tuition, books.
- First-time home: Up to $10k lifetime.
- Jobless health insurance: Unemployment premiums.
Rule 72(t) SEPP
IRS allows penalty-free withdrawals via formula. Three methods exist (RMD, amortization, fixed annuitization). Must continue 5 years or until 59.5 (longer of two). Cannot change mid-plan.
Example: Age 50, IRA $300k, life factor 34.2. Annual withdrawal: $300k / 34.2 = $8,772/year. Continue until 55 minimum.
Wash-Sale Rule Trap
Sell losing position Dec 15, cannot buy same security until Jan 15 (30-day window). If you violate: loss disallowed, cost basis increases (loss deferred, not lost).
Workaround: Sell Apple, buy S&P 500 index. Different investment, captures return, no wash-sale.