The Early Distribution Penalty refers to a financial penalty imposed on individuals who withdraw funds from their retirement accounts, such as an Individual Retirement Account (IRA) or a 401(k) plan, before reaching a specified age.
The age at which you can start making penalty-free withdrawals from these accounts is 59 and a half years old in the United States. If you withdraw funds before reaching this age, you will typically have to pay an early distribution penalty, which is typically 10% of the amount you withdraw.
For example, if you withdraw $10,000 from your IRA or 401(k) before you are 59 and a half, you would typically owe a $1,000 penalty in addition to any income taxes that may be due on the withdrawal.
There are certain exceptions to this penalty. For instance, you might not have to pay the penalty if you use the funds for specific purposes like buying a first home, paying for qualified higher education expenses, or if you become disabled, or face serious financial hardship. However, income tax may still be owed on these withdrawals.
Keep in mind that the specifics around retirement account withdrawal penalties may year over year, so it’s always a good idea to consult with a financial advisor or do your own research to understand the current rules and regulations.