Is the 10% Penalty on Early Withdrawal Waiver For 2022?
Financial planners typically impose a 10% penalty for early distributions from tax-advantaged retirement accounts like 401(k)s and IRAs before age 59 1/2; however, hardship distributions or life events may exempt savings from such charges.
Under new rules, savers can withdraw without incurring penalties if their funds are necessary for covering emergency situations caused by federally declared disasters.
First-time homebuyer exception
The first-time homebuyer exception allows individuals to withdraw up to $10,000 from their IRA without incurring the 10% penalty when buying, building or rebuilding their first house – though any such withdrawal remains subject to regular income tax liability, according to one IRS representative.
For you to qualify as a first-time homebuyer under IRS guidelines, it must meet their definition. In other words, no primary residence was owned in the two years preceding your purchase of your new residence and if married both partners must fulfill these criteria.
Funds must also be used for qualified acquisition costs, which may include costs related to purchasing, building or rebuilding a house and certain related expenses. You can withdraw the money without incurring a penalty by following one of three IRS-approved distribution methods known as substantially equal periodic payments (SEPPs), which depend on either your life expectancy or that of both you and the beneficiary – something which can prove quite complex! Getting it just right may take practice!
Total and permanent disability
Total and permanent disability is a widespread condition that often forces individuals to access their retirement accounts early. Claims related to it usually involve significant injuries or illnesses which will impact them for life – for instance losing a limb or experiencing neurological disabilities.
The IRS allows certain exceptions to its 10% penalty on early withdrawal, including disabilities, unreimbursed medical expenses and separation from service at age 55 (50 for public safety employees). Once you withdraw funds from an IRA custodian account, they should provide a Form 1099-R that reports your withdrawal amount and lists Box 7 as being subject to any exceptions from penalty assessment.
If you wish to claim this exemption, a physician’s statement certifying you as totally and permanently disabled may be required. A fill-in-the-blank version can be found within Schedule R’s instructions for Credit for Elderly or Disabled Taxpayers.
Death of account holder
After an account holder dies, their designated beneficiary usually inherits their account and must liquidate it within 10 years or face penalties from the IRS.
Under normal circumstances, the 10% penalty on early withdrawal applies to anyone withdrawing funds from an IRA, traditional 401(k), 403(b), SEP-IRAs and SIMPLE IRAs prior to age 59 1/2. With the 2022 Secure Act 2.0 passed by Congress however, some exceptions were added for these penalties.
Some individuals who qualify as disabled will also be exempt from paying the penalty; these include people suffering from severe physical or mental impairment that will likely result in their death or indefinitely limit their ability to engage in gainful activity. Furthermore, the permanent and total disability exemption also covers people with an eligible medical condition as defined by Social Security Administration.
Unreimbursed medical expenses
Savers may make use of their IRA or workplace retirement plan account to take out penalty-free distributions to cover unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. Qualified expenses include preventive care, treatments and surgeries as well as prescription drugs, appliances such as glasses/contact lenses/false teeth/hearing aids as well as travel expenses to access care. Elective procedures or cosmetic treatments that don’t meet medical necessity criteria don’t qualify.
Other exceptions allow savers to withdraw funds without incurring the 10% penalty in circumstances such as losing a job, needing child or alimony support payments, domestic violence and terminal illness. Distributions from tax-deferred accounts still count as income; however, under COVID-19 pandemic emergency situations these penalties are waived according to IRS Notice 2020-50/IR-20124; survivors of terrorist attacks as well as military reservists called up and victims of natural disasters can also use their savings accounts without penalty.
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