Posted by Ronald J. Fichera Aug 04, 2022
There is a lot of confusion surrounding the 10% penalty that the IRS imposes on early distributions from retirement plans. Most people know that this penalty exists for those who withdraw tax-deferred retirement funds before age 59½, though many don't realize it is on top of whatever your current tax rate is.
Many people also have heard that there are exceptions to the 10% penalty, though they almost never fully understand what those exceptions are and when they are applied.
Today we will explain when and where these exceptions to early withdrawal penalties are applied by breaking down distributions into three different groups: traditional IRAs, retirement plans other than IRAs, and finally a group that includes both IRAs and retirement plans.
The exceptions to the penalty for traditional IRAs are the ones most people have heard of, but they often assume they apply to any type of plan, which isn't necessarily the case. The following exceptions are strictly limited to traditional IRAs. These exceptions don't apply to 401(k)s, 403(b)s or other tax-deferred retirement plans:
Qualified retirement plans, such as 401(k)s, 403(b)s, profit-sharing plans and Keogh plans, offer a few more options for avoiding the 10% early withdrawal penalty than IRAs do, including:
Some exceptions can apply to both IRAs as well as retirement plans, and they include:
These are the majority of the exceptions, and they only apply as listed. You can't interchange them, or you will be subject to the under age 59½ penalty.
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This article was provided by T. Eric Reich for Kiplinger Magazine and brought to you by the Ronald J. Fichera Law Firm, where our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, contact us today!
This is not tax advice and should not be construed as such. Please seek professional tax services for more information and advice that will apply to your specific tax situation.
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