Taking money from a retirement plan before age 59½ triggers a 10% early withdrawal penalty on top of ordinary income taxes. Exceptions exist, and they vary depending on whether you have an IRA or a Solo 401(k).
The IRS treats retirement accounts as long-term savings vehicles. To discourage early access, IRC Section 72(t) imposes a 10% additional tax on distributions taken before you reach age 59½. This penalty applies on top of any ordinary income taxes owed on the amount withdrawn.
One thing applies regardless of your plan type or the circumstances: if the distribution comes from a pre-tax account, it is taxable as ordinary income. The 10% penalty is an additional charge layered on top. Roth accounts are treated differently since contributions were already taxed, but earnings may still be subject to penalty if the distribution is not qualified.
Exceptions to the 10% penalty do not eliminate the income tax obligation. They only remove the extra 10% charge. If you qualify for an exception and take an early distribution from a pre-tax account, you still owe ordinary income tax on the amount received.
Both IRA and Solo 401(k) plans recognize a set of exceptions, but the two lists are not identical. Some exceptions apply only to IRAs. Others apply only to qualified plans like the Solo 401(k). A few appear in both.
Disability and death are recognized under both plan types. If you become permanently disabled or distributions are made to your beneficiary after death, the 10% penalty does not apply.
The first-time homebuyer exception is available to IRA holders only. A lifetime limit applies, and it does not extend to Solo 401(k) plans.
Qualified higher education expenses are also an IRA-only exception. Solo 401(k) plans do not recognize this category.
Separation from service at age 55 or later is a Solo 401(k) exception with no IRA equivalent. If you stop working in or after the year you turn 55, distributions from your Solo 401(k) for that year or later may avoid the penalty.
Birth or adoption of a child is a more recent exception recognized under both plan types, subject to a per-event dollar limit.
The plan type you hold determines which exceptions are available to you. Assuming an exception applies because you've heard it mentioned in a general retirement context can lead to an unexpected tax bill. The full exception lists for each plan type are covered in the related articles below.
Because exception rules interact with your overall tax situation, consulting a qualified tax professional before taking an early distribution is strongly recommended.
This information is provided for educational purposes only and should not be interpreted as tax, legal, or investment advice. Readers are encouraged to consult a qualified professional who can offer guidance based on their personal situation.