Avoiding Early Distribution Tax

What is Early Distribution Tax On Retirement Plans?

To prevent investors from depleting their retirement savings, the IRS imposes a penalty of 10% for making any withdrawals or distributions from your retirement plans before you reach the age of 59.5.  There are, however, exceptions to every rule it seems when it comes to the tax code.  With this article, we will cover the exceptions for qualified plans such as the 401(k), 403(a), 403(b), SEP IRA, Traditional IRA, Roth IRA, SIMPLE IRA, and Roth 401k to name a few.

Exceptions to Early Distribution Tax Penalty on all Qualified Plans

  • Becoming the age of 59.5
  • Distributions made to beneficiary due to death of account owner
  • Distributions as a result of disability
  • Election to take substantially equal periodic payments in a non-IRA qualified plan.  Employee must sever ties with employer before payments can be made.
  • Distributions due to an IRS levy.
  • Distributions to qualified military reserves who were called to duty between the dates: 9/11/2001 and 12/31/2007.
  • Distributions to pay for medical expenses which were greater than 7.5% of your adjusted gross income.

Exceptions which Only Apply to Non-IRA Qualified Plans

  • Distribution of dividends from ESOPs
  • Distributions made to another payee under a qualified domestic relations order
  • Distributions made after the age of 55 if you have terminated service with that employee.

Exceptions for IRA Plans only

  • First Time Home Buyers
  • Distributions to pay for health insurance if you are unemployed
  • Distribution which are less than or equal to qualified education expenses

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