A withdrawal made before you are 59½ years old from your retirement savings plan "whether it is an IRA or a qualified plan through an employer"is considered to be an early withdrawal. For every early withdrawal you make, you will have to pay a 10% early distribution tax to the federal government.

How Can I Make Early Withdrawals without Paying the 10% Tax?

Generally, you will not want to start dipping into your retirement savings early unless there are dire circumstances that demand otherwise. There are a few exceptions that allow you to start making early withdrawals without facing the 10% tax: 

  • If you take distributions from your account in equal annual installments, and those installments are designed to spread out over you entire life, most likely you will not have to pay the early distribution tax. Note: If you choose this option with an employer's retirement plan, you can only elect to do it if you are no longer employed there. With an IRA, your employment status does not matter.
  • If you decide to retire when you are at least 55, you can take distributions from your employer's retirement plan once you quit work without suffering any early distribution tax. You do not even have to stay retired; you may work for another employer and still take distributions from your former employer's retirement plan. The only rule you need to remember is that you cannot be working for the employer from whose retirement plan you are taking the distributions.
  • Some employers offer employer stock ownership plans (ESOP), which are similar to a pension plan except that an employee may receive distributions in stock rather than cash (though not always). However, the dividends received from the stock are not subject to the early distribution tax
  • In terms of distribution going to your beneficiaries, once you have died your beneficiaries can receive distributions from your account without being subject to the early distribution tax AS LONG AS your account is rolled into your beneficiary's account.
  • If you become permanently disabled (and it must permanent to qualify), you may receive distributions from your retirement plan without incurring the early distribution tax

Seeking Legal Help

Be sure to read over any forms you received when you opened your retirement account. These forms can explain how the account works, including what taxes are applied and when. If you have an employment plan, you may want to ask your employer for more information about the tax implications. Finally, you may want consult a tax attorney for help understanding how you contributions to and distributions from the account are taxed. Your attorney can help you understand when and how your earnings are taxed, and help you choose what kind of retirement plan may be best suited for your needs.