Is the 10% Early Withdrawal Penalty Waiver For 2022?
Though you might wish to save up your retirement funds until age 59 1/2, unexpected expenses may force you to withdraw early from traditional or Roth IRAs – incurring a 10% early withdrawal penalty in both instances.
There are exceptions to this penalty for certain distributions, including emergency personal expenses and buying your first home.
There may be many reasons for needing to access your retirement savings prior to age 59 1/2, including uninsured medical expenses that exceed 10% of adjusted gross income, buying your first home; paying off an existing mortgage or home equity loan; funeral costs; or eviction or foreclosure expenses. Hardship withdrawals are subject to taxes as well as the 10% early withdrawal penalty.
Your employer must determine if you qualify for a hardship distribution using one of two substantiation methods; either traditional substantiation (using actual source documents as evidence) or summary substantiation (relying solely on your statement of financial need without needing actual source documents as sources). Either method must adhere to ERISA documentation retention rules.
In cases of financial difficulty, you may also be eligible to withdraw money from a 403(b), which is similar to a 401(k), though doing so will incur taxes and early withdrawal penalties of 10%.
Higher Education Expenses
College can be costly, but certain expenses may qualify for tax breaks. Learning which expenses count and what documentation you require can help maximize any education-related tax breaks available to you.
The IRS defines qualified education expenses as tuition and fees required to attend or enroll at a particular educational institution, including course-related books, supplies and equipment (such as textbooks). Also included are student activity fees that must be paid on campus as well as housing and meal costs that might be required if attending at least half-time.
Tuition and Fees Deduction, American Opportunity Credit and Lifetime Learning Credit are three tax breaks designed to promote education–the tuition and fees deduction, American Opportunity Credit and Lifetime Learning credit–that have different definitions but all share one criterion: expenses must be “required for enrollment or attendance” at an eligible educational institution. Although the IRS doesn’t list specific expense categories that qualify for these tax breaks, such as medical costs, transportation or child care costs.
Buying a First Home
First home purchases are an important milestone in life and represent a substantial financial investment. Federal programs exist to assist first-time buyers, while lenders compete to offer attractive loan terms to first-time homebuyers.
As a first-time buyer, you can withdraw funds without incurring a 10% penalty from either an IRA or 401(k). However, any distribution made will still be subject to income tax unless one of the exceptions apply.
Relying on retirement money to purchase your first home can be a risky venture and should only be undertaken if it makes financial sense for you. For instance, taking a withdrawal may enable you to qualify for lower mortgage rates or forego private mortgage insurance costs, making the early withdrawal penalty and income tax bill worthwhile. Before making this kind of move, however, make sure that an emergency savings fund covering three to six months of living expenses exists first.
People diagnosed with terminal illnesses face unique challenges. They need to sort through their affairs, plan ahead and pay for necessary treatments or care that may prove costly.
Under current law, a person is considered terminally ill if their disease cannot be cured within six months and will result in their death within that timeframe. This includes cancer, advanced dementia (including Alzheimer’s) motor neurone disease (MND/ALS) and more.
Under the Secure 2.0 Act, distributions from an IRA or employer plan made to terminally ill individuals will no longer incur the 10% penalty (this rule takes effect December 29). Other exceptions include emergency expenses up to $10,000 plus inflation indexing or 50% of account balance whichever is less), emergency expenses up to an annual inflation indexing threshold and domestic abuse victims self-certifying themselves; withdrawals from these accounts do not incur penalties and can be paid back over three years; however other distribution types remain subject to penalties.
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