Tax-Deferred Investments

What Happens If I Withdraw Money from My Tax-Deferred Investments Before Age 59½?

Withdrawing taxable funds from a tax-deferred retirement account before age 59½ generally triggers a 10% federal tax penalty, on top of any federal income taxes due. (Distributions from Section 457(b) plans are generally not subject to an early distribution penalty; and the penalty for distributions from SIMPLE plans during your first two years of participation is 25%, 10% thereafter.) However, there are certain situations in which you are allowed to make early withdrawals from a retirement account and avoid the tax penalty. (Check your specific plan provisions to see whether a particular withdrawal option is available.)

IRAs and employer-sponsored retirement plans have different exceptions, although the rules are similar.

IRA exceptions

The following distributions are not subject to the 10% penalty tax:

  • Death of the IRA owner. Distributions to your designated beneficiaries after your death. (Beneficiaries are subject to annual required minimum distributions.)
  • Disability. Distributions made due to your qualifying disability.
  • Unreimbursed medical expenses. Distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your adjusted gross income in a calendar year.
  • Medical insurance. Distributions made to pay for health insurance if you've lost your job and are receiving unemployment benefits.
  • Substantially equal periodic payments (SEPPs). Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You must withdraw funds at least annually based on one of three rather complicated IRS-approved distribution methods. You generally can't change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do you'll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
  • Qualified higher-education expenses for you and/or your dependents.
  • First home purchase, up to $10,000 (lifetime limit).
  • Qualified reservist distributions. Certain distributions to qualified military reservists called to active duty.

Employer-sponsored plan exceptions

The following distributions are not subject to the 10% penalty tax:

  • Death of the plan participant. Upon your death, your designated beneficiaries may begin taking distributions from your account. Beneficiaries are subject to annual required minimum distributions.
  • Disability. Distributions made due to your qualifying disability.
  • Part of a SEPP program (see above). Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You generally cannot modify the payments for a period of five years or until you reach age 59½, whichever is longer.
  • Attainment of age 55. Distributions made to you upon separation of service from your employer. The separation must have occurred during or after the calendar year in which you reached the age of 55 (age 50 for qualified public safety employees).
  • Qualified Domestic Relations Order (QDRO). Payments made to an alternate payee under a QDRO.
  • Medical care (see above). Distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your adjusted gross income in a calendar year.
  • To reduce excess contributions. Distributions made to correct excess contributions you or your employer made to the plan over the allowable amount.
  • To reduce excess elective deferrals. Distributions made to reduce amounts you deferred over the allowable limit.
  • Qualified Reservist Distributions (see above).

If you plan to withdraw funds from a tax-deferred account, make sure to carefully examine the rules on exemptions for early withdrawals. For more information on situations that are exempt from the early-withdrawal tax penalty, visit the IRS website at www.irs.gov.

 

The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the ­purpose of ­avoiding any ­federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the ­purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2025 Broadridge Financial Solutions, Inc.

Investment and Insurance Products are:

  • Not Insured by the FDIC or Any Federal Government Agency
  • Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
  • Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested

This information is intended for use only by residents of (AL, AZ, CA, CO, CT, DC, DE, FL, GA, HI, ID, IL, IN, KY, MA, MD, ME, MI, MN, MO, MT, NC, NH, NJ, NM, NV, NY, OH, OK, OR, PA, PR, SC, SD, TN, TX, UT, VA, WA, WI, WY). Securities-related services may not be provided to individuals residing in any state not listed above. Please consult with the FA as s/he may not be registered in all states.

For parties residing outside of the U.S., this information is: (i) provided for informational purposes only, (ii) not and should not be construed in any manner as an offer to participate in any investment or to buy or sell any securities or related financial instruments, and (iii) not and should not be construed in any manner as a public offering of any financial services, securities or related financial instruments. Products and services listed may not be available, or may have restrictions, depending on client country of residence.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN). Wells Fargo Advisors is the trade name used by Wells Fargo Clearing Services, LLC and WFAFN, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. Any other referenced entity is a separate entity from WFAFN.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

A note about Social Media: Opinions, comments and actions taken on Social Media are those of the third party and do not necessarily reflect the views of the creator of this profile or of the firm. Social Media is intended for U.S. residents only and subject to the following terms: wellsfargoadvisors.com/social.


© 2022 Wells Fargo Clearing Services, LLC. All rights reserved.

FINRA’s BrokerCheck Obtain more information about our firm and its financial professionals

FINRA’s BrokerCheck Obtain more information about our firm and its financial professionalsX