Is the 10% Penalty on Early Withdrawal Waiver For 2022?
People save for retirement using tax-deferred accounts like IRAs and 401(k) plans that offer tax deferral. Early withdrawal can incur a 10% penalty and increase their tax bill significantly.
However, due to the pandemic, the IRS relaxed some access rules for these funds. This article explores those changes and their potential impact.
Many Americans keep their savings safe in tax-advantaged retirement accounts like IRAs and 401(k) plans. Although the IRS imposes a 10 percent penalty on withdrawals prior to age 59 1/2, in certain circumstances that fee may be waived.
Individual Retirement Accounts, commonly known as IRAs, come in many different varieties: traditional IRAs, Roth IRAs and SEP IRAs (Simplified Employee Pension). Contributions made to traditional IRAs may be tax-deductible while earnings accumulate tax-deferred until distribution.
Self-employed individuals and small business owners may also set up SEP IRAs, which offer similar advantages as traditional IRAs but permit contributions from both employer and employee. According to IRS rules, SEP IRA holders may take penalty-free withdrawals from their accounts to cover unreimbursed medical expenses exceeding 10 percent of adjusted gross income that were incurred during the same year as their deduction.
401(k)s are retirement accounts that allow workers to save pre-tax dollars tax-deferred until retirement when it will become taxable as ordinary income.
Savers withdrawing funds before reaching age 59 1/2 typically must pay an extra 10% penalty in addition to income taxes; however, Congress recently made exceptions for certain savings plans.
One exception allows savers with terminal illnesses to withdraw funds without incurring penalties from their 401(k). This change forms part of Secure 2 reforms package.
An exception allows savers to withdraw funds from their 401(k) before age 59 1/2 in exchange for substantially equal periodic payments spread over their life expectancy. Unfortunately, getting this wrong can be costly; therefore savers should carefully weigh all benefits of this option before selecting it.
Categorised in: Blog