EXCEPTIONS TO 10% PENALTY TAX ON EARLY DISTRIBUTIONS
Most retirement plan (Qualified Plans, Traditional IRA's, SEP-IRA's, SIMPLE IRA's) distributions are subject to ordinary income tax.
"Early" Distributions (those distributions before reaching age 59 1/2 are called "early" or "premature" distributions) and are subject to an Additional 10% Penalty Tax UNLESS an exception applies.
Distribution will NOT be subject to the 10% Penalty Tax Exception to Additional 10% Penalty Tax
in the following circumstances Qualified Plan Traditional IRA,SEP-IRA, SIMPLE-IRA
Age after participant/IRA owner reaches age 59 1/2.................................................Yes......................................................Yes
Death after death of participant/IRA owner................................................................Yes......................................................Yes
Disability total & permanent disability of the
participant/IRA owner.............................................................................................Yes......................................................Yes
Education qualified higher education expenses........................................................No.......................................................Yes
Equal Payments series of substantially equal payments..........................................Yes.......................................................Yes
Homebuyers qualified first-time homebuyers, up to $10,000......................................No........................................................Yes
IRS Levy of the plan....................................................................................................Yes.......................................................Yes
Health Insurance if you're unemployed......................................................................No.........................................................Yes
Medical amount of unreimbursed medical expenses (>7.5% AGI, after 2012,
10% if under age 65)................................................................................................Yes........................................................Yes
Qualified Domestic Relations Order to an alternate payee......................................Yes........................................................N/A
Separation From Service employee separates from service during or after
the year the employee reaches age 55 (age 50 for public safety employees of a
state or political subdivision of a state, in a governmental defined benefit plan).....Yes..........................................................No
Proper rollovers & direct trustee-to-trustee transfers...................................................No...........................................................No
Section 457(b) (governmental) plans........................................................................Yes...........................................................No
Adoption or Birth withdrawals taken within 1-year after a birth or adoption,
for up to $5,000 per child..........................................................................................Yes............................................................Yes
SOME SPECIAL TAX RULES TO BE AWARE OF
NOTE: Withdrawals from a Qualified Domestic Relations Order are exempt from the 10% penalty, but this is not the case if the funds are rolled over to an IRA and withdrawan from there.
NOTE: Separation From Service: The key here is the date of separation, not the date of distribution
NOTE: Section 457(b) (governmental) plans: If the funds are rolled over to an IRA, however, the exception is lost.
NOTE: SIMPLE IRA distributions incur a 25% additional tax instead of 10% if made within the first 2 years of plan participation.
This article does not cover ROTH-IRA's.
There may other types of distribution not covered in the above chart.
Form 1099-R: Distributions are reported on Form 1099-R and coded to show the type of distribution taken along with other information.
Avoid Potential Problems:
The best way to avoid any potential penalty is to avoid early/premature distributions if possible and to use a direct-trustee-to-trustee transfer (and not the so called 60-day rollover since this has many potential tax traps if not done properly) if you absolutely have to take a distribution.
Mistakes Can Be VERY VERY Expensive: Try to Plan Accordingly
Before taking any distribution, plan very carefully since you generally cannot undo what has been done if you change your mind or violated any of the rules.
If you absolutely have to take distributions that you know are going to be subject to the Additional 10% Penalty Tax, try to take them in a year when you may be in a lower tax bracket and or take them as needed instead of a lump-sum (since you cannot return unneeded funds back to the plan once made).
To avoid a large unexpected tax bill and or possible tax penalties, consider having federal income taxes withheld from your distributions.
CALL NOW 561-746-1926 or 561-339-8102 if you have any questions or concerns or would like to schedule a FREE, Confidential, No-Obligation Tax-Saving Consultation.