Accessing Retirement Funds Penalty Free

Accessing Retirement Funds Penalty-Free

Exceptions to the 10% premature distribution penalty

 

IRA

Qualified Retirement Plan*

[401(k), 403(b), etc.]

Attainment of age 59 1⁄2

x

x

Death

x

x

Disability

x

x

Series of substantially equal periodic payments

x

x

IRS levy

x

x

Medical expenses in excess of 10% of AGI

x

x

Qualified reservist distribution

x

x

Health insurance premiums for unemployed individuals

x

 

Qualified higher education expenses

x

 

First-time homebuyer (Limited to $10,000)

x

 

Separation from service during or after the year in which a participant turns age 55

 

x

Qualified domestic relations order (QDRO)

 

x

ESOP dividends

 

x

Corrective distribution of excess contributions

 

x

The advantages of tax-qualified retirement plans and IRAs are very beneficial for those saving for retirement. Saving in a tax-deferred status can help to provide for more growth and hence a more lucrative retirement.

Contact your Wealth Advisor for more details.

In order to take advantage of these benefits and discourage participants from accessing funds prior to retirement, the IRS generally imposes a 10% premature distribution penalty on distributions taken before age 59 1⁄2.

However, there are situations where a participant may need to access their retirement funds and some exceptions to the penalty can apply. You may use the chart on the previous page to help you understand what exceptions generally apply to penalties on early distributions from a qualified retirement plan or IRA. Keep in mind that any distributions that qualify for the exception will still be subject to ordinary income tax.

Exceptions

Attainment of age 59 1⁄2 (IRA, QRP)

Distributions made on or after the date on which the taxpayer attains age 59 1⁄2.

Death (IRA, QRP)

Distributions made to a beneficiary or taxpayer’s estate following the taxpayer’s death.

Disability (IRA, QRP)

Distributions made to individuals who are considered disabled under IRC Section 72(m). IRC Section 72(m) states that “an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”

Series of substantially equal periodic payments (IRA, QRP)

Distributions made over the life or life expectancy of the individual or the joint lives or life expectancies of the individual and his/her designated beneficiary; frequently referred to as “72(t)” or “72 (q)” distributions. In order for a payment to be considered part of a series of substantially equal periodic payments, it must be taken at least annually and continue for the longer of 5 years or until the individual attains age 59 1⁄2. The IRS has published three safe harbor calculation methods that may be used to determine the allowable payment amount. (See IRS Pub. 590)

IRS levy (IRA, QRP)

Distributions made on account of a federal tax levy.

Medical expenses (IRA, QRP)

Distributions made to an individual for unreimbursed medical expenses — generally those in excess of 10% of adjusted gross income (AGI).

Qualified reservist distribution (IRA, QRP)

Distributions made to a qualified reservist during an active duty period lasting longer than 179 days. Qualified reservist distributions may come from an IRA or from elective deferrals made to a 401(k) or 403(b) retirement plan.

Health insurance premiums (IRA)

Distributions made to unemployed individuals for health insurance premiums, so long as the individual has received unemployment compensation for 12 consecutive weeks and the IRA distributions are made during the same or succeeding taxable year in which the unemployment compensation is paid. (May not exceed actual amount paid for insurance for taxpayer, spouse and dependents.)

Qualified higher education expenses (IRA)

Distributions made for qualified higher education expenses for education furnished to the IRA owner, the IRA owner’s spouse, or any child or grandchild of the IRA owner. (May not exceed actual QHEE.)

First-time homebuyers (IRA)

Distributions of up to $10,000 (as defined in section 72(t) of the internal revenue code) to cover acquisition costs associated with the first-time purchase of a residence for the IRA owner, the IRA owner’s spouse, or any child, grandchild, or ancestor of the IRA owner or IRA owner’s spouse.

Separation from service during or after the year in which a participant turns age 55 (QRP)

Distributions from an employer-sponsored QRP made to an individual who has separated from service with that employer.

Qualified domestic relations order (QRP)

Distributions from a tax-qualified plan made to an alternate payee pursuant to a QDRO following a plan participant’s divorce.

Corrective distribution of excess contributions (QRP)

Distributions made to correct excess taxpayer elective deferrals (relating to the IRC section 402(g) limit), excess employer contributions (relating to the actual deferral percentage [ADP] test) or excess aggregate contributions (relating to the actual contribution percentage [ACP] test).

Securities offered through J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA & SIPC. Hilliard Lyons does not offer tax or legal advice. This piece is intended for general education purposes and cannot be relied upon to avoid any tax penalties. Please consult your tax advisor or attorney before making any decision that may affect your tax or legal situation. ©2018 All rights reserved.

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J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA, & SIPC

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