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Categories: General Tax Terms

Early Withdrawal Penalty refers to a fee imposed by financial institutions or the Internal Revenue Service (IRS) for withdrawing funds from certain types of accounts before a specified age or term.

In the context of retirement accounts, like Individual Retirement Accounts (IRAs) or 401(k) plans, the Early Withdrawal Penalty typically applies to distributions taken before the account holder reaches the age of 59½. The penalty is generally 10% of the amount withdrawn, in addition to any regular income tax that may be owed on the withdrawal.

For example, if a person withdraws $10,000 from their IRA before turning 59½, they might incur a penalty of $1,000 (10% of $10,000) on top of the taxes owed on that amount. Certain exceptions may apply, such as for first-time home purchases or qualified educational expenses.

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