IRA Early Withdrawal Penalties in California: 10% + 2.5%

If you take money out of an IRA before age 59½ as a California resident, the IRA early withdrawal penalty in California is 12.5% of the taxable amount: a 10% federal additional tax under Internal Revenue Code Section 72(t) plus a separate 2.5% California additional tax collected by the Franchise Tax Board.¹² Both penalties sit on top of the regular federal and state income tax you owe on the distribution, and a long list of exceptions can wipe them out.

How the Two Penalties Stack

The 10% federal penalty applies to the taxable portion of any early IRA distribution, regardless of the IRA type. For traditional, SEP, and SIMPLE IRAs, that usually means the whole withdrawal. California’s 2.5% penalty mirrors the federal rules and uses the same taxable base, so amounts that escape the federal penalty generally escape the California one too.²

SIMPLE IRAs carry a harsher version. If you pull money out within the first two years of participating in the plan, the federal penalty climbs from 10% to 25%, and California’s climbs from 2.5% to 6%.³⁴

On a $20,000 early traditional IRA withdrawal, the penalties alone come to $2,500 before either government collects income tax on the distribution. Add California’s marginal income tax rates and the combined federal marginal rate, and a meaningful share of the withdrawal can disappear to taxes and penalties.

Roth IRAs Work Differently

Roth IRA distributions follow an ordering system that often produces zero penalty. Withdrawals come out of three buckets in this order: your original contributions, then conversion amounts, then earnings. Because you already paid tax on your contributions, taking back up to that amount at any age produces no penalty and no income tax.

The penalty only bites when you reach into conversion amounts withdrawn within five years of the conversion, or into earnings before both age 59½ and the five-year account age are satisfied. If your withdrawal stays inside the contributions bucket, you walk away clean.

Exceptions That Eliminate Both Penalties

Federal law lists more than a dozen situations where the 10% penalty is waived even though you’re under 59½, and California generally conforms to those exceptions, so qualifying federally usually cancels the 2.5% state penalty too.⁵ The distribution is still taxable income in most cases. You escape the penalty, not the tax.

The most commonly used IRA exceptions:⁶

Death of the IRA owner (distributions to beneficiaries) or total and permanent disability of the owner.
Substantially equal periodic payments (SEPP) taken over your life expectancy. Payments must continue at least five years or until you turn 59½, whichever is later. Break the schedule and prior penalties come back retroactively.⁷
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (only the excess portion qualifies).
Health insurance premiums while unemployed, if you’ve received unemployment benefits for at least 12 consecutive weeks.
Higher education expenses for you, your spouse, your children, or your grandchildren, including tuition, fees, books, and room and board.
First-time home purchase, up to a $10,000 lifetime cap, for buying, building, or rebuilding a first home.
Birth or adoption expenses, up to $5,000 per child, within one year of the birth or the adoption becoming final.
Qualified reservist distributions for reservists called to active duty for at least 180 days.
IRS levy on the IRA itself.

Inherited IRAs deserve a separate note. If you inherit an IRA, distributions are not subject to the 10% early withdrawal penalty no matter how old you are, whether you inherited from a spouse, a parent, or anyone else.

Newer Exceptions Under SECURE 2.0

The SECURE 2.0 Act added several penalty exceptions that took effect January 1, 2024. California generally conforms.⁵

Terminal Illness

If a licensed physician certifies that you have a condition reasonably expected to result in death within 84 months, you can withdraw any amount without the 10% penalty.¹ The certification has to be dated no later than the distribution date. Self-certification is not allowed. You can repay within three years and treat the distribution as if it never happened.

Emergency Personal Expenses

One withdrawal of up to $1,000 per calendar year for an unforeseeable or immediate personal or family emergency is penalty-free.⁸ The cap is not indexed for inflation. You have three years to repay; if you don’t, you have to wait until that window closes before taking another emergency withdrawal. Your account balance has to stay above $1,000 after the withdrawal.

Domestic Abuse

Victims of domestic abuse can self-certify and withdraw the lesser of $10,000 (indexed for inflation) or 50% of the vested account balance, penalty-free. The distribution has to happen within 12 months of the abuse. Three-year repayment applies.

Federally Declared Disasters

Up to $22,000 in distributions connected to a federally declared disaster is exempt from the penalty. Given California’s wildfire, earthquake, and flood exposure, this one comes up. Three-year repayment applies.

Where California Does Not Follow Federal Rules

California conforms to most federal penalty exceptions, but a couple of important gaps remain. If you fall into one, the 10% federal penalty is waived but California’s 2.5% still hits.

California does not recognize Health Savings Accounts. The federal one-time penalty-free rollover from an IRA into an HSA doesn’t exist for California purposes, so California treats it as a premature distribution and applies the 2.5% additional tax.⁹

Federal law now allows rolling 529 plan funds into a Roth IRA under certain conditions. California does not conform. The rollover amount is included in California taxable income and subject to the 2.5% penalty.⁵

Both gaps are easy to miss because tax software applies federal rules by default. If you did either transaction, check that your California return reflects the state’s treatment.

Undoing a Withdrawal Within 60 Days

If you take a distribution and then change your mind, you have 60 days from the date you receive it to deposit the funds back into the same or another IRA. A completed rollover inside that window erases the tax and the penalty entirely.¹⁰

Two catches. First, you can only do one indirect IRA-to-IRA rollover in any 12-month period, and the IRS aggregates all your IRAs (traditional, Roth, SEP, and SIMPLE) for that limit. Break the rule and the returned funds are treated as an excess contribution taxed at 6% per year, while the original distribution is fully taxable with the 10% penalty. Second, trustee-to-trustee transfers, where the money moves directly between custodians, don’t count against the once-per-year limit and are the safer route.

If you miss the 60-day deadline for reasons outside your control, the IRS can waive it, but approval isn’t automatic. You may need to self-certify under a qualifying event or apply for a private letter ruling.

Watch the Withholding

The default federal withholding on an IRA distribution is 10% of the gross amount. You can change it (including down to zero) by filing IRS Form W-4R with your custodian. California generally requires state withholding on retirement distributions as well, and you can opt out.

The 10% default rarely covers the actual bill. Between regular income taxes and the two penalties, a California resident in a combined 30%-plus marginal bracket can owe far more than what was withheld. If you don’t adjust withholding or make estimated tax payments, you’re also exposed to an underpayment penalty on top of everything else. The IRS calculates that quarterly, so a large mid-year withdrawal can trigger an underpayment charge even if you pay everything you owe by April.

Filing to Claim an Exception

Even if an exception clearly applies, you have to claim it on the right form or the penalty gets assessed automatically.

IRS Form 5329 is where you calculate the 10% federal penalty or enter the code for the exception you’re claiming. The result flows to your Form 1040.¹¹
FTB Form 3805P is California’s equivalent. You calculate the 2.5% penalty (or 6% for early SIMPLE IRA distributions) and claim any applicable exceptions. The amount goes on your Form 540.⁴

Neither agency assumes you qualify. If your custodian issues a Form 1099-R with an early-distribution code and you don’t file Form 5329 showing the exception, the IRS will bill you for the 10% penalty. The same logic applies to Form 3805P on the California side. Tax software handles most cases automatically, but if you’re filing manually or claiming something unusual like SEPP or a terminal illness certification, review both forms before you submit.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
State of California Franchise Tax Board. Early Distributions
3
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
4
California Franchise Tax Board. California Form 3805P – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
5
Franchise Tax Board. 2025 Instructions for Form FTB 3805P Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. Substantially Equal Periodic Payments
8
Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
9
Franchise Tax Board. 2024 Instructions for Form FTB 3805P
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
11
Internal Revenue Service. Instructions for Form 5329