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Taking a
Distribution from Your Retirement Plan?
Avoid the Early Withdrawal Penalty...
By: Renee
Daggett
Many people find that they need to withdraw
funds from an existing retirement plan for such things as unforeseen
expenses or to buy a home. Though it’s not recommended that you pull
money out of your retirement fund early, the IRS does recognize that there
will be circumstances in which taxpayers may need to do so.
 Distributions
from an IRA, 401(k) or other retirement plan generally MUST be included as
part of your taxable income. Additionally, if you are under 59 ½
years old, your withdrawal will usually be subject to an additional penalty
tax of 10%. Note…that’s IN ADDITION to the regular income tax you
must pay on the withdrawal. A little known fact is that this penalty
may also apply to Roth IRAs – even if it has been at least five years since
you first opened the account. And, if you withdraw money from a
Simple IRA that you began participating in during the last two years, then
your early distribution penalty will be 25% instead of 10%!
Given the tax consequences, it’s important to
consider the impact before you tap your retirement accounts for short-term
emergencies.
Luckily, there are exceptions to every rule,
and the IRS has put some in place. If you qualify for any of these
exceptions, you will not have to pay the additional 10% tax penalty on your
early retirement distribution. Two set of exceptions exist. The
first applies to individual retirement accounts (traditional and Roth
IRAs). The second set applies to 401(k) and 403(b) retirement plans.
Here are the exceptions to the penalty for
taking an early distribution from your IRA, AVOID THE EARLY PENALTY by
meeting one:
1.You did a “direct rollover” to your new
retirement account
2.You received a lump-sum payment but rolled over the money to another
qualified retirement account within 60 days
3.You were permanently or totally disabled
4.You were unemployed and used it to pay for health insurance premiums
5.You paid for college expenses for yourself or a dependent
6.You bought a house…this exception requires that you did not own a home in
the previous two years and allows you to take only $10,000 from your
retirement account
7.You paid for medical expenses exceeding 7.5% of your adjusted gross
income (you do not need to itemize on your taxes in order to claim this
exception
8.The IRS levied your retirement account to pay off your tax debts
 Unfortunately,
the restrictions are greater when taking an early withdrawal from your
401(k) or 403(b) plan. Those exceptions are as follows:
1.Distributions upon your death or disability
2.You were age 55 or older and retired or left your job
3.You received the distribution as part of “substantially equal payments”
over your lifetime
4.You paid for medical expenses exceeding 7.5% of your adjusted gross
income…again, you do not need to itemize on your taxes to be able to claim
this
5.The distributions were required by a divorce decree or separation
agreement, also known as a qualified domestic relations court order
It’s important to recognize the difference between the two sets of
exceptions. Many taxpayers have taken money from his or her 401(k)
plan for college or down payment on a home only to find out that their
withdrawal does not qualify for the penalty exception. One
alternative to consider is checking if your 401(k) or 403(b) plan offers an
option for you to take out a loan repayable over five years.
Generally, the IRS permits you to borrow up to 50% of the balance of your
retirement account, up to a maximum loan of $50,000.
For more information on this topic or
assistance with your early withdrawal options and tax preparation, please
call us at Admin Books.
Did You Know?
 •When
traveling, a
business day is 4 hours and 1 minute.
•If
you do not file your tax return by the deadline, the
penalty is 5% per month with a maximum of 25%. If you do not
pay your taxes owed by the deadline, the penalty is .5% per
month. (It is better to at least file your return on time and not pay, than
not file at all.)
•Most people know that teachers can deduct $250 for
expenses paid for the classroom. What people don’t
always know is that the techer's aide is also eligible for the deduction.
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