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Exceptions to the "Early Withdrawal Penalty"

To discourage people from using their retirement plans for non-retirement purposes, the IRS imposes a 10% penalty on all taxable distributions received prior to age 59. This additional tax is due on the portion of the distribution that is includable as income on Form 1040. However, there are certain exceptions to this penalty, some of which only apply to certain plans:

Exceptions for all qualified plans, including IRAs:

  • Death distributions made to your beneficiaries (or estate) after your passing
  • Disability must meet the IRSs definition of totally and permanently disabled (from the IRS: [the taxpayer] cannot engage in any substantial gainful activity because of a physical or mental condition; a qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death)
  • Substantially equal periodic payments/SEPP 72(t) distributions must be made over your life expectancy or the life expectancies of you and your designated beneficiary and must last for at least five years or the attainment of age 59, whichever is later; if a company retirement plan, you must separate from service prior to beginning payments
  • Deductible medical expenses to the extent that distributions exceed 10% of Adjusted Gross Income (AGI)
  • IRS levy distributions made to satisfy debts owed by a delinquent taxpayer
  • Qualified reservist distributions applies to individuals called to active duty at least 180 days after Sept. 11, 2001

Exceptions for qualified plans only:

  • Separation from service separation from service must occur in or after the year you reach age 55, age 50 if a qualified public safety employee (state or local government)
  • Qualified Domestic Relations Order (QDRO) payments made to an ex-spouse as a result of divorce proceedings
  • Employee Stock Ownership Plan (ESOP) dividends dividends from company stock plan
  • 457(b) plans these plans are not subject to the early withdrawal penalty

Exceptions for IRAs only:

  • Education expenses to the extent distributions equal, but not exceed, qualified higher education expenses; limited to expenses for the taxpayer, their spouse, their children, and their grandchildren
  • Health insurance to the extent distributions equal, but not exceed, insurance premiums paid while unemployed; must have received a minimum of 12 consecutive weeks of unemployment compensation to qualify
  • First time homebuyer must be qualified acquisition costs of a principal residence and lifetime withdrawals cannot exceed $10,000

If you are considering taking an early distribution from your IRA, you may wish to consider having a MASTERPLAN done first. This financial plan will take a comprehensive look at your financial situation and help uncover potential alternatives or ensure your early distribution meets all qualifications. Please contact Hefren-Tillotson for further details.

Investment Advisory Team

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