Courtesy of Watson Wealth Management
Withdrawing taxable funds from a tax-deferred retirement account before age 59½ generally triggers a 10 percent federal income tax penalty, on top of any federal income taxes due. (Distributions from Section 457(b) plans are generally not subject to an early distribution penalty, and the penalty for distributions from SIMPLE IRA plans during your first two years of participation is 25 percent, 10 percent thereafter.) However, there are certain situations in which you are allowed to make early withdrawals from a retirement account and avoid the tax penalty. (Check your specific plan provisions to see whether a particular withdrawal option is available.)
IRAs and employer-sponsored retirement plans have different exceptions, although the rules are similar.
IRA Exceptions
- Death of the IRA owner: Distributions to your designated beneficiaries after your death. (Beneficiaries are subject to annual required minimum distributions.)
- Disability: Distributions made due to your qualifying disability.
- Unreimbursed medical expenses: Distributions equal to the amount of your unreimbursed medical expenses that exceed 10 percent of your adjusted gross income in a calendar year. (You don’t have to itemize deductions to use this exception, and the distributions don’t have to actually be used to pay those medical expenses.)
- Medical insurance: Distributions made to pay for health insurance if you’ve lost your job and are receiving unemployment benefits.
- Substantially equal periodic payments: Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You must withdraw funds at least annually based on one of three rather complicated IRS-approved distribution methods. You generally can’t change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do, you’ll again wind up having to pay the 10 percent penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
- Qualified higher-education expenses for you and/or your dependents.
- First home purchase, up to $10,000 (lifetime limit).
- Qualified reservist distributions: Certain distributions to qualified military reservists called to active duty.
Employer-Sponsored Plan Exceptions
- Death of the plan participant: see above.
- Disability: see above.
- Part of a SEPP program: see above Attainment of age 55: Distributions made to you upon separation of service from your employer. The separation must have occurred during or after the calendar year in which you reached the age of 55 (age 50 for qualified public safety employees).
- Qualified Domestic Relations Order: Payments made to an alternate payee under a QDRO.
- Medical care (see above): Distributions equal to the amount of your unreimbursed medical expenses that exceed 10 percent of your adjusted gross income in a calendar year.
- To reduce excess contributions/deferrals. Distributions made to correct excess contributions you or your employer made to the plan over the allowable limits.
- Qualified reservist distributions (see above).
If you plan to withdraw funds from a tax-deferred account, make sure to carefully examine the rules on exemptions for early withdrawals. For more information on situations that are exempt from the early-withdrawal income tax penalty, visit the IRS website at www.irs.gov.
Insurance products from the Principal Financial Group® are issued by Principal National Life Insurance Company (except in New York), Principal Life Insurance Company, and the companies available through the Preferred Product Network, Inc. Securities and advisory products offered through Principal Securities, Inc., 800/247-1737, Member SIPC. Principal National, Principal Life, the Preferred Product Network, and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392. Peter Watson, Principal National and Principal Life Financial Representative, Principal Securities Registered Representative. Watson Wealth Management is not an affiliate of any company of the Principal Financial Group®. CPA does not provide tax or accounting services on behalf of the companies of the Principal Financial Group®.
The material provided does not necessarily reflect the views or opinions of Principal Financial Group®. Broadridge is not affiliated with any company of the Principal Financial Group®. Principal Financial Group® does not endorse the commentary, opinions, or views of the article. This material should be considered general information and should not be used as the primary basis for a financial decision. It is provided with the understanding that the member companies of the Principal Financial Group® are not rendering legal, accounting, or tax advice.
