What's the Difference Between an Early Withdrawal Penalty and a Required Minimum Distribution?

Retirement accounts come with two very different withdrawal rules depending on your age — one penalizes you for taking money too early, and the other requires you to take money out eventually. The early withdrawal penalty is a 10% additional tax on money you take out of a traditional IRA or 401(k) before age 59½, on top of the regular income tax you owe. This penalty can be waived for certain reasons, such as a first home purchase, qualified education expenses, disability, or substantially equal periodic payments. Required minimum distributions (RMDs) are the opposite problem: once you reach age 73, you must begin taking a minimum amount out of your traditional retirement accounts each year or face a 25% penalty on the amount you should have withdrawn. Roth IRAs have no RMDs during the owner's lifetime, which is one of their key advantages for people who don't need the money right away.