Take Early Withdrawals Penalty-Free

Is 60 the new 40? People today live longer than they did in earlier times and stay more active later in life. But the tax law provisions based on age, especially those relating to employer retirement plans and IRAs, haven’t changed. In other words, regardless of your lifestyle, the magic age to begin penalty-free distributions remains 59½.

What about early withdrawals made before that age? Generally, those will be subject to a 10% penalty in addition to the regular income tax you owe. But several key exceptions to the 10% penalty are written into the tax code. The list differs, depending on whether you’re withdrawing funds from a 401(k) or another plan from your job or an IRA you set up on your own.

Here’s a rundown on exceptions to the 10% penalty for withdrawals from 401(k)-type plans. They include distributions:

  • Made to your beneficiary or estate after your death;
  • Made because you are totally and permanently disabled;
  • Made as part of a series of substantially equal periodic payments over your life expectancy (or the life expectancies of you and a designated beneficiary) if you stop working at the company with the plan;
  • To the extent you have deductible medical expenses exceeding 10% (7.5% if you or your spouse are age 65 or older) of your adjusted gross income (AGI);
  • Made due to an IRS levy of the plan under code section 6331;
  • That are qualified reservist distributions;
  • Made after you left the company after age 55 (age 50 for certain public safety employees);
  • Made to someone else under a qualified domestic relations order; and
  • Of dividends from employee stock ownership plans (ESOPs).

The exceptions to the 10% penalty tax for early distributions from IRAs include those that are:

  • Made to a beneficiary or estate because of the IRA owner's death;
  • Made on account of disability;
  • Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and a designated beneficiary;
  • Qualified first-time homebuyer distributions;
  • Not in excess of your qualified higher education expenses;
  • Not in excess of certain medical insurance premiums paid while unemployed;
  • Not in excess of your unreimbursed medical expenses above the stated percentage of AGI;
  • Due to an IRS levy; and
  • A qualified reservist distribution.

There are some significant differences between these two lists. For example, a payout at age 55 or older when you leave a job is an exception for employer plan distributions, but not IRAs. Conversely, the exception for qualified first-time homebuyer expenses only applies to IRAs. We can help guide you in making the withdrawal decisions that are best for your situation.

This article was written by a professional financial journalist for G.W. Sherwold and is not intended as legal or investment advice.

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