Sometimes you just can’t avoid dipping into a retirement fund, but you might be able to qualify for an exception to the 10% tax penalty.

Pulling money from your pre-tax retirement accounts before age 59½ should be done only as a last resort since it can end up triggering both a 10% penalty as well as ordinary income tax. A far better solution is to use money from non-retirement accounts, such as joint accounts, single accounts, or most trust accounts, where there will be no penalty on early retirement withdrawal and often little or far less tax.

But the reality is, sometimes people have nowhere else to go other than their pre-tax retirement plan to access needed cash. In such a situation, the income tax cannot be avoided, but the 10% early withdrawal penalty sometimes can be.

The most important thing to do to avoid paying an unnecessary penalty is to become familiar with what exception applies to what retirement plan. Many people who end up paying the penalty do so because the exception they used did not apply to the retirement account they took the money from. The good news is that most of the 10% penalty exceptions apply to both company plans, as well as IRAs, but as you’ll see, there are some very valuable exceptions that apply only to one or the other.

A simple way to remember which penalty exception applies to which type of retirement plan is to think of three categories of early-withdrawal exceptions:

1. 10% Penalty Exceptions That Apply to “Both” Company Retirement Plans and IRAs.

This includes distributions to your beneficiaries after your death, disability, unreimbursed medical expenses above 7.5% of your adjusted gross income (you don’t have to itemize to use this exception), Roth IRA conversions, and up to $5,000 for the birth or adoption of a child.

There are also some new exceptions that came into law with the passage of the SECURE Act 2.0 of 2022. Under this new law, you can tap your retirement accounts if you’re dealing with domestic abuse, coping with a natural disaster or if you’re diagnosed with a terminal illness, Also, starting in 2024, there will be a new emergency personal expense exception of up to $1,000.

And finally, if you need to take income on your retirement account before 59½, if you agree to set up a regular income known as Substantially Equal Periodic Payments(opens in new tab) for at least five years or until you reach age 59½, whichever comes later, such income can be taken without a 10% penalty.

2. Exceptions That Apply “Only” to IRAs.

This includes higher education expenses for yourself or your dependents, up to $10,000 toward a home for a first-time home buyer and to pay for health insurance if you are unemployed.

3. Exceptions That Apply “Only” to Company Retirement Plans.

There are two big ones here.

The first is the attainment-of-age-55 exception. Distributions made to you if you leave your company during or after the calendar year in which you reached age 55 (or age 50 for qualified public safety employees) will avoid the 10% penalty. The other is the Qualified Domestic Relations Order (QDRO)(opens in new tab), which means withdrawals made to the other spouse as part of a divorce will avoid the 10% penalty.

While the best approach, if you need to get your hands on some cash, is to use only a pre-tax retirement account as a last resort, if this can’t be avoided, remember that old saying “what you don’t know can hurt you.” You not only should know what the exceptions are, but you should become familiar with what exception applies to what retirement plan. This may save you what can sometimes be in the thousands or tens of thousands of dollars in unnecessary penalties.