What Are the Exceptions to the 10% Early Withdrawal Penalty?

Typically, the IRS charges you a 10% early withdrawal penalty if you withdraw from a retirement account before age 59 1/2. But there are exceptions within tax code to this rule.

Medical expenses top the list, followed by education costs for yourself, your spouse or children. Other expenses could include buying your first home or satisfying an IRS levy on your account.

1. Withdrawals for medical expenses

To withdraw money without incurring income tax or a 10% penalty from a retirement account without incurring income tax or penalties of at least 59 1/2 years old, although exceptions to this rule exist such as medical hardship withdrawals.

Unpenalized withdrawals can be taken from an IRA to cover medical or dental expenses that exceed 7.5% of your adjusted gross income (AGI). Health savings accounts and Archer Medical Savings Accounts also allow withdrawals without penalty to cover such hardship expenses.

2. Withdrawals for unpaid federal taxes

Individual retirement accounts (IRAs) generally offer tax advantages, yet withdrawing funds before age 59 1/2 triggers income taxes and often a 10% penalty from the IRS. There are a few exceptions, however.

First and foremost, to be eligible to remove a federal tax lien you must satisfy any outstanding tax debt and have an impeccable history of filing and paying tax returns on time.

3. Qualified reservist distributions

An order or call to active duty of at least 179 days and up to an indefinite period allows reservists to access their IRA and tax-deferred accounts penalty-free; these rules were established under the HEART Act in 2008.

Other exceptions may include payments related to birth or adoption of a child, expenses related to federally declared disasters and distributions based on terminal illness.

4. Withdrawals for death

On the death of an IRA owner, their designated beneficiaries may take penalty-free distributions using either their life expectancy or that of the account holder’s remaining life expectancy as the basis for taking distributions from it. Within 10 years they must liquidate it.

When withdrawing money from tax-deferred retirement accounts before age 59 1/2, usually a 10% penalty applies. But there are exceptions that could cause you to pay less tax: here are some.

5. Withdrawals for disability

SSDI payments do not depend on unearned income; thus distributions from retirement accounts won’t erode them. To avoid incurring the 10% penalty imposed by the IRS, however, you must meet their definition of totally and permanently disabled.

To check whether or not your disability withdrawal satisfies this criteria, take a look at Box 7 on your 1099-R form and determine whether code 3 (Disability exclusion) appears there. Some financial organizations will refuse to use code 3, while some require a doctor’s statement as proof.

6. Withdrawals for unemployment

There are certain circumstances under which it may be permissible for you to withdraw 401(k) funds without incurring the 10% early withdrawal penalty, such as paying unemployment insurance premiums while unemployed.

Previous studies have shown that withdrawals by unemployed 401(k) accounts lead to greater liquidity constraints and reduce future retirement income (Beshears et al., 2015), so any waiver of this penalty would be of particular interest.

7. Withdrawals for qualified education expenses

Withdrawals from traditional or Roth IRAs may be subject to both income taxes and an early withdrawal penalty of 10%, unless an exception applies.

Example: IRA owners withdrawing money for books and materials required for enrollment qualify as exceptions from penalties.

Consult a financial advisor to assess whether any exceptions apply in your case.

8. Withdrawals for qualified long-term care expenses

Seniors looking for long-term care insurance have one strategy in common that stands out: using pretax funds from their health savings accounts to purchase long-term care coverage and thus avoid incurring an early withdrawal penalty of 10%.

Income taxes will still apply to withdrawals made under LTCi policies, and qualified medical expenses need to be covered by your policy in order for this strategy to work successfully. It’s unlikely many buyers will see much benefit as most opt for LTCi after age 55-60.

9. Withdrawals for qualified retirement plan distributions

Sometimes it becomes necessary to withdraw some of your retirement savings without incurring the 10% penalty, and IRS has provisions which permit certain distributions without incurring this charge.

These expenses typically include medical, education and down payment expenses on a first home; dividends from an employee stock ownership plan (ESOP); however there may be exceptions but they are more limited.

10. Withdrawals after death

Financial institutions typically withdraw funds from bank accounts belonging to deceased relatives after their deaths; depending on how their account was set up prior to death, this practice can continue in some instances requiring legal executors to immediately inform these companies that a relative has died and withdraw money as quickly as possible from these bank accounts in order to prevent illegality and any possible unlawful withdrawals of funds from accounts owned by deceased relatives.

Non-spouse beneficiaries of an IRA must take required minimum distributions (RMDs) over the lifetime or 10 year expectancies of themselves or any dependants they inherit, with exceptions being made for spouses and children who are disabled or chronically ill.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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