Retirement Plan Early Distrubutions

In general, and regardless of the type of plan, distributions prior to reaching age 59 ½ (other than if you die) are subject to a 10% early distribution penalty. There are a number of exceptions – most are for any type of plan, some are more limited. The following, in no particular order, should give you a pretty good idea of the range of exceptions to the age 59 ½ (or death) general threshold. For this purpose, there are 2 types of plans (there are many more, but for this purpose – as to early withdrawal penalties – there are 2 types) – qualified plans (generally speaking anything from an employer), as contrasted with IRA/SEP/SIMPLE.

• Medical – if used to pay unreimbursed medical expenses in excess of 7.5% of your income; HOWEVER,

• Medical – used to pay health insurance premiums while unemployed – exception does not apply as to qualified plans,

• Domestic relations/divorce – when paid to an alternate payee (typically a spouse) under a QDRO, or, as part of a divorce agreement direction to distribute some part of an IRA,

• Domestic abuse – when paid to a victim of domestic abuse, up to the lesser of $10,000 or 50% of the account,

• Homebuyers – for a qualified first-time homebuyer, up to $10,000 (does not apply to a qualified plan),

• Birth or adoption – when used to pay for qualified birth or adoption expenses, up to $5,000 per child,

• Terminal illness – when made to a terminally ill employee, so certified by a physician (does not apply to IRA and similar type plans)

• Disability – if paid due to total and permanent disability,

• Military – when paid to qualified military reservists called to active duty,

• Education – when paid for qualified education expenses (does not apply to qualified plans),

• Disaster recovery – distributions paid following an economic loss by reason of a federally declared disaster up to $22,000,

• Emergency personal expenses – used to pay personal or family emergency expenses, up to the lesser of $1,000 or the vested account balance over $1,00,0

• Separation from service – when paid to an employee following separation from service during or after the year that employee reached age 55 (in some limited cases, age 50) (does not apply to IRAs and similar).

You will note from the above there are a number of words that require much more explanation and definition – such as qualified and emergency. This restates a caution we often express – there are many ideas and thoughts presented herein, but many of them require a more significant effort to understand the underlying tax rules than merely taking at face a brief, summarized sentence. That by the way is a fancy way of saying – get professional advice.

If you have any questions please contact Kal at kal@barsongroup.com