US early withdrawal rules
Standard 10% Early Withdrawal Penalty
Applies to:
Traditional and Roth 401(k), Traditional IRA withdrawals before age 59½
On top of:
Regular income taxes (except for Roth contributions)
Example cost:
$10,000 withdrawal = $1,000 penalty + $2,200 taxes (22% bracket) = $3,200 total cost
US penalty exceptions
| Exception | Applies To | Details |
|---|---|---|
| First-time home purchase | IRA only | Up to $10,000 lifetime |
| Higher education expenses | IRA only | You, spouse, children, grandchildren |
| Medical expenses | Both IRA & 401(k) | Above 7.5% of AGI threshold |
| Disability | Both IRA & 401(k) | Total and permanent disability |
| Substantially Equal Payments (72t) | Both IRA & 401(k) | Fixed payments for 5 years or until 59½ |
| Rule of 55 | 401(k) only | Leave job at 55+ (50+ for public safety) |
Roth IRA special rules
More Flexible Access
Contributions anytime
Withdraw original contributions tax and penalty-free at any age
Earnings restrictions
Must be 59½ + account open 5 years for tax-free earnings withdrawal
Conversion ladder strategy
Convert Traditional IRA to Roth, wait 5 years, withdraw penalty-free
Canada withdrawal rules
🇨🇦 TFSA (Tax-Free Savings Account)
No penalties ever
Withdraw any amount at any age without tax or penalty
Contribution room restoration
Withdrawn amount is added back to contribution room next January 1st
No income impact
TFSA withdrawals don't affect income-tested benefits (GIS, CCB, OAS)
RRSP Withdrawals
No penalty, but costly
Full amount added to taxable income + withholding tax
Withholding tax rates
10% (up to $5,000), 20% ($5,001-$15,000), 30% (over $15,000)
Lost contribution room
Cannot re-contribute withdrawn amounts (unlike TFSA)
Locked-In Accounts (LIRA/LIF)
Generally locked until retirement age
Earliest access typically 55, varies by province
Unlocking provisions
Financial hardship, shortened life expectancy, small amounts
Provincial differences
Each province has different unlocking rules and conditions
Smarter alternatives to early withdrawal
Use Taxable Savings First
No penalties on regular investment accounts
Capital gains may qualify for preferential tax rates
Preserve tax-advantaged space for long-term growth
401(k) Loans (If Available)
Borrow up to 50% of balance or $50,000, whichever is less
Repay yourself with interest (typically 5-6%)
Risk: If you leave job, loan typically due immediately
Bridge with Other Income
Part-time work or consulting income
Spousal income or support
Home equity line of credit (carefully considered)
Special programs for early access
🇺🇸 Roth IRA Conversion Ladder
Convert Traditional IRA to Roth IRA annually
Wait 5 years, then withdraw converted amount penalty-free
Ideal for early retirees with low-income years for conversions
🇨🇦 Home Buyers' Plan (HBP)
Withdraw up to $35,000 from RRSP for first home
Must repay over 15 years starting in second year
Missed repayments become taxable income
Lifelong Learning Plan (LLP)
Withdraw up to $20,000 from RRSP for education
Must repay over 10 years
For you or spouse's full-time education or training
⚠️ When NOT to Withdraw Early
- • For lifestyle spending: Vacation, car, non-essential purchases
- • Market timing: Moving money based on market predictions
- • Without considering alternatives: Not exploring other funding sources first
- • For investments: Withdrawing to invest elsewhere rarely makes sense
- • Credit card debt: Often better to negotiate payment plans than raid retirement
💡 Pro Tips
- • Plan ahead: Build emergency funds in taxable accounts before needing retirement funds
- • Know the rules: Penalty exceptions can save thousands in specific situations
- • Consider timing: Low-income years may be better for taxable withdrawals
- • Get professional advice: Complex rules warrant expert guidance for large amounts
Frequently Asked Questions
Can I access Roth IRA money penalty-free before 59½?
Yes, you can withdraw your original contributions anytime without penalty. For earnings, you need to meet the 5-year rule and be 59½, or qualify for specific exceptions like first-time home purchase.
Is RRSP withdrawal ever a smart move?
Possibly during very low-income years when you'd be in a low tax bracket, or to avoid higher future brackets. However, the lost contribution room and compound growth make this generally unattractive.
Do rules change for government programs?
Yes, laws evolve regularly. For example, the CARES Act temporarily waived some early withdrawal penalties. Always verify current exceptions and rules before taking action, as outdated information can be costly.
What's the best strategy for early retirement access?
Build a "bridge" using taxable accounts and cash for the first 5-10 years, then use Roth conversion ladders and penalty-free withdrawal strategies. Plan this well in advance of early retirement.