An early withdrawal penalty is the 10% tax the IRS charges when you take money out of retirement accounts like 401(k)s, IRAs, or 403(b)s before age 59½. This penalty comes on top of the regular income taxes you'll owe on the withdrawal. The penalty exists to discourage people from raiding their retirement savings prematurely—these accounts are designed to support you in your later years, not to serve as emergency funds. However, there are exceptions that let you avoid the penalty, including using funds for a first home purchase (up to $10,000 from an IRA), qualified education expenses, certain medical costs, or if you become disabled. Some plans, like 457 plans, don't have this penalty at all if you've left your job. Before tapping retirement funds early, explore all your options—the 10% penalty plus taxes can take a significant bite out of your savings, potentially derailing your long-term financial security.

Exceptions to the 10% early withdrawal penalty will differ depending if it’s coming from an Individual Retirement Account (IRA) versus an employer plan (like a 401k).