What is the penalty for early withdrawal from a retirement account before age 59½?

The penalty for early withdrawal from a retirement account, such as a 401(k) or an IRA, is typically 10%, in addition to any applicable income taxes. This means that if you withdraw funds from these accounts before reaching the age of 59½, you will face a 10% penalty on the amount withdrawn, in addition to being required to pay regular income taxes on the distribution.

This early withdrawal penalty serves to encourage individuals to keep their retirement savings until they are closer to retirement age, helping to ensure that funds are available for their intended purpose. There are certain exceptions where individuals may be able to withdraw funds without incurring this penalty, but the default rule is the 10% penalty plus taxes. Understanding this aspect of retirement accounts is essential for effective financial planning and avoiding unexpected costs when accessing retirement funds early.