What if I want to use money from my retirement account before I retire?

So, you’re thinking of dipping into your retirement account. Here are some points to consider first:¹

What is an early withdrawal?

In many cases, if you take money out of your retirement account before you reach age 59 ½, the Internal Revenue Service (IRS) considers the action to be an “early withdrawal.” Unless you meet one of the exceptions below, the IRS will charge you a 10% early withdrawal penalty on the money you take out.² On top of that penalty, you may have to pay federal and state taxes on the withdrawal. And, if the withdrawal amount is large enough, it may bump you into a higher tax bracket.

Are there exceptions to the 10% penalty?

Yes. But know that, in many cases, you will still have to pay income tax on the early withdrawal.³

The IRS has a long list of situations that let you avoid the 10% penalty.⁴ Here are a few of the exceptions:

• Up to $5,000 per child to pay for birth or adoption
• The account owner dies or becomes “totally and permanently” disabled
• Up to $22,000 if a federally declared disaster causes you economic loss
• Up to $1,000 per year for a personal or family emergency
• Unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI)
• Hardship withdrawal: If you have an “immediate and heavy financial need,” your workplace retirement plan might allow you to take a hardship withdrawal.
• Loan: Some workplace retirement plans let you borrow money from your own account and then pay yourself back into that account.⁵ If the loan meets the rules and you follow the repayment schedule, then, in addition to avoiding the 10% penalty, you will likely not have to pay income taxes on the loan. But, when you pay yourself back, you generally have to pay yourself interest. This interest is yours to keep.
• Taking out your contributions from a Roth account: If you have a Roth account, some of the money in the account is what you put in (your “contributions”). And some of the money in the account is the growth that happened after you put money in (“earnings”).
• Some Roth workplace retirement plans let you take an early, non-hardship withdrawal. But the IRS requires you to withdraw some earnings along with your contributions. The IRS uses a proportion of contributions to earnings to calculate the amount of earnings you must withdraw. You will have to pay a 10% penalty on those earnings you withdraw (but not on the contributions). And, if five years have not passed since January 1 of the year in which you first contributed to the Roth 401(k)/403(b) from which you withdraw, then you will also have to pay income taxes on earnings (not contributions) you withdraw.
• A Roth IRA lets you withdraw contributions (not earnings) tax-free and penalty-free at any age. If five years have not passed since January 1 of the tax year in which you first contributed to any of your Roth IRAs, then you will have to pay income taxes on earnings (not contributions) you withdraw. And if you are not yet 59 ½ years old, then you will also have to pay a 10% penalty on those earnings (not contributions) you withdraw.
• Substantially equal periodic payments (“SEPP” or “SoSEPP”): This is an arrangement where you agree to take a withdrawal each year for at least 5 years or until you reach age 59 ½, whichever comes later. Depending on how old you are when you begin a SEPP, you could be locked in for a long time. So, understand the rules before committing to this option.
• Rule of 55: If you leave your job (voluntarily or involuntarily) when you are 55 or older, the workplace retirement plan from your most recent employer may let you take penalty-free withdrawals. You can use this method whether you leave your job voluntarily or involuntarily. And public safety workers (“law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew, such as police officers, firefighters, EMTs, and air traffic controllers”) get to use this rule beginning at age 50.
• Rollover: Some workplace retirement plans have different early withdrawal options than IRAs. So, if you have money in both a workplace account and an IRA, you could consolidate some or all of the funds. For example, if your workplace plan allows loans, but you don’t have much saved in that workplace account, you could roll money from an IRA into the workplace account to be able to take a bigger loan. Or, if you need cash to pay for higher education, health insurance premiums while you’re unemployed, or your first home purchase, you could consider rolling money from a workplace account into an IRA. Unlike some workplace plans, IRAs let you avoid the 10% penalty to pay for some of these costs.

What should I consider before making an early withdrawal?

• Is there another way I can meet my cash need?
• If you’re having a financial emergency: At Just Futures, we recognize that, too often, working-class and poor people have to make tough financial choices. Having enough money to make ends meet and invest for retirement can be really hard. Sometimes, you just need the money, period. But sometimes there are workarounds. For example, some utility companies have emergency assistance programs or discounts for customers experiencing hardship. And some charities give money for specific needs, like car repairs. Some quick research could help you get the funds you need while keeping your retirement investment safe.
• If your expense is negotiable: Can you delay for a few months while you find ways to earn more or spend less? Or can you settle for a cheaper solution for now?
• What are the IRS penalties? Unless your situation qualifies for an exception, you will likely have to pay a 10% penalty.
• What are the plan penalties? Talk to your plan provider to understand whether you can take an early withdrawal and what the effects would be.
• How much income tax will I have to pay on the withdrawal? Even if you avoid the 10% penalty, you may have to pay federal income tax on the money you take out. Some states may charge you income tax on the withdrawal, too.
• How might I get back on track toward my retirement savings goal when I’m ready to begin saving again? You could make a plan to check in three to six months from now with yourself or a “money buddy” (a friend, family member, or someone else you trust). At that future time, you might be in a better place to increase your regular retirement savings amount. Over time, keeping your long-term financial goals in mind could help you bounce back from a temporary setback.

An early withdrawal could harm your long-term savings plan

If you’ve managed to invest something already, leaving it in the account (if you can) may help it grow. And compounding growth may help you prepare for retirement.

When you take out money early, your future self doesn’t just miss out on the amount you take now (plus maybe the 10% penalty or taxes). Your future self also loses the possible growth that amount could have earned.

Let’s say, for example, you have $10,000 in a 401(k) today. If you take $5,000 out now, in 30 years, you could miss out on more than $28,000 worth of growth.⁶ To see how an early withdrawal could change your long-term savings path, check out NerdWallet’s calculator.

Hungry for more knowledge? Read on if you’re thinking about how much money you might need during retirement.

If you don’t have a retirement investing account, or if your employer contracts with a different retirement plan provider, we’d love to show you Just Futures’ services! Contact us: info@justfutures.com.

~Lisa, Manager of Coalitions and Worker Power

¹If you can, talk to a tax, financial, or retirement advisor before withdrawing money from your retirement account.

²Some retirement plans have different rules. For example, if you take an early withdrawal from a governmental 457(b) plan, you do not have to pay a 10% penalty unless the money came from a rollover from another type of plan or IRA. But for SIMPLE IRA, if you withdraw money within the first 2 years of participating in the plan, you must pay a 25% penalty instead of 10%.

³Two cases in which you get to avoid taxes on an early withdrawal are: 1) taking out Roth contributions (you may still have to pay tax on earnings) and 2) loan, as long as you follow the rules and repayment schedule.

⁴Even though the IRS may define your situation as an exception to the 10% penalty, your retirement plan may not allow an early withdrawal. Contact your employer (also known as your “plan sponsor”) to learn more.

⁵When you pay yourself back for this kind of loan, you generally do it through a payroll deduction. If you leave your job before fully repaying, you may have to either pay back the rest all at once or treat the rest as a withdrawal, on which you would pay tax and – if you are under age 59 ½ – the 10% penalty.

⁶This example is based on NerdWallet’s calculator. It assumes, “[. . .] an average annual return of 6%, which is slightly lower than the historical average annual stock market return after adjusting for inflation. The missed savings amount is calculated by subtracting the growth of your balance before and after taking a cash withdrawal. Future balance with withdrawal [$28,717.46] does not include the cash amount withdrawn. Future balance without withdrawal [$57,434.91] shows the growth of the original amount saved in retirement without the withdrawal.” This example is hypothetical. It demonstrates a mathematical principle. It does not illustrate any investment products. It does not show past or future performance of any specific investment.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind.

The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Just Futures explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors.

Investing involves the risk of loss that clients should be prepared to bear. No investment process is free of risk; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that your investment will be profitable. Past performance is not a guide to future performance. The value of investments, as well any investment income, is not guaranteed and can fluctuate based on market conditions.

Just Futures shares third-party links and references solely to share sources and social, cultural and educational information. Any reference in this post to any person or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of Just Futures, or any of its employees or contractors acting on their behalf. Just Futures does not guarantee the accuracy or safety of any linked site.

Published August 14, 2025