One thing I frequently hear investors get confused about is the 10% penalty on premature distributions from retirement accounts, and when they do and do not apply. If those under age 59 ½ make a mistake as it relates to premature withdrawals, it can result in thousands of dollars or more lost that can’t be undone.
The confusion around the 10% penalty exemption tends to center around where the distribution is coming from. There are two places that distributions can come from, and they are an IRA or a retirement plan. This week, let’s look at when the exemption applies to either or both.
IRAs
These exceptions only apply to IRAs and not retirement plans:
1. First time homebuyer
2. Higher education expenses
3. Health insurance for unemployed individuals
Retirement plans
Only retirement plans allow the following exceptions:
1. Age 50 Public Safety Employees (or 25 years of service)
2. Age 55 and retired
3. Governmental (sect. 457) Plans
4. Qualified Domestic Relations Order (QDRO) from a divorce
5. Pension-linked savings accounts up to $2,500
6. And less commonly, Phased Retirement Distributions from federal plans
Both IRAs and retirement plans
These exceptions apply to both:
1. Disability
2. Terminal illness
3. Death
4. IRS Levy
5. Substantially equal periodic payments known as IRS code 72(t)
6. Medical expenses to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI)
7. Emergency expenses up to $1,000
8. Birth or adoption up to $5,000
9. Domestic abuse up to $10,300
10. Federally declared disaster areas up to $22,000
11. Active reservists
It’s not hard to see why these exceptions get confused often. Hopefully, this list will help you when making distributions prior to age 59 ½. As always, consult your tax advisor before making any retirement account distributions.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
