IRA Withdrawal – Exceptions to the 10% Early Distribution Penalty
As a general rule, early withdrawals from IRAs and retirement plans before age 59 1/2 incur an early distribution penalty of 10%; however, the following exceptions allow you to overcome unexpected financial needs without harming long-term savings:
Benefits may include medical expenses and unemployment payments. Furthermore, beneficiaries of inherited accounts can avoid penalties by rolling them over into non-inherited accounts of their own.
Public safety employees
Public safety employees serve our communities and devote their careers to safeguarding and serving others. In recognition of their sacrifice, numerous laws have been enacted granting access to their retirement savings without incurring the 10% early withdrawal penalty.
According to the Defending Public Safety Employees Retirement Act of 2015, federal law enforcement officers, customs and border protection officers, firefighters and air traffic controllers can withdraw funds from their traditional TSP accounts without incurring the 10% early withdrawal penalty at any age. This provision was expanded through SECURE Act 2.0 that passed in December 2022.
The 10 percent early withdrawal penalty does not apply to distributions from 401(k), 403(b), or 457(b) retirement plans or individual retirement accounts (IRAs), though you will still owe income taxes on what you withdraw; additionally, 0.5% Medicare taxes must also be paid on it. You can avoid this tax by withdrawing funds over time in equal installments from your retirement accounts in series of substantially equal payments throughout your life or that of beneficiaries.
Education expenses
Typically, withdrawals made prior to age 59.5 incur a 10% penalty in addition to regular income tax liability. There are exceptions for educational expenses; these expenses include tuition fees, books, supplies and equipment required for enrollment at an eligible institution and room and board if the student enrolls half-time.
Teachers and school employees dedicate their careers to shaping future generations’ minds, so Congress has recognized this service by permitting educators and school employees to withdraw from their 403(b) plans without incurring an early withdrawal penalty of 10%.
To qualify, an IRA owner must present proof of this exception, such as separation from service records, active duty orders or official documentation from their employer’s pension plan administrator. Understanding this exception is crucial if using your IRA for education expenses; speak to a Farm Bureau financial professional for more information regarding these rules and how they might impact you.
IRS levy
When withdrawing funds before age 59 1/2 from an IRA or tax-favored retirement plan, those under the age of 59 1/2 must pay an extra 10% tax (often known as the penalty) to discourage premature distributions and encourage more savings for retirement. This penalty aims to deter premature distributions while encouraging people to put aside more savings for later.
There are exceptions to this rule, including disability and hardship; however, before taking any withdrawals. These special circumstances could help manage unexpected financial circumstances without jeopardizing long-term savings plans.
If there’s a levied account in your IRA, the easiest way to remove it is contacting the IRS and asking them for its release within 21 days if its due to unpaid taxes. They usually agree, otherwise you might need a CPA to handle it for you. They will send a letter explaining your rights as an investor to request a hearing within 30 days.
Qualified reservist distributions
IRA account holders typically must wait until age 59 1/2 to withdraw funds without incurring penalties, although there are exceptions that allow early access. For example, the IRS allows you to circumvent its 10% penalty by setting up substantially equal periodic payments (SoSEPP). SoSEPP distributions should reflect either your life expectancy or that of both you and the beneficiary in equal installments over time. You could also avoid it by using funds for qualified higher education expenses, first-time home purchases, or medical insurance premiums while unemployed.
Another exception is the Qualified Reservist Distribution, which refers to any tax-free distribution from an IRA or amounts attributable to elective deferrals under a 401(k), 403(b), or similar plan available only to reservists called to active duty for at least 180 days. You may also make penalty-free withdrawals of Health Care FSA contributions if domestic abuse has taken place.
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