Early Withdrawal Exceptions Explained
I recently wrote about the 72(t) rules and we are often asked, “Are there exceptions to IRS rule 72(t) for early retirement income?” Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax (and additional penalties).
Generally, the amount of money an individual takes out of an IRA or Retirement Plan prior to age 59½ is called an “early” (or “premature”) distribution. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.
There are exceptions in the IRS code that allow an early or premature withdrawal from your IRA or 401(k) plan without the 10% penalty being assessed. The section of the Internal Revenue Service code that addressed these exceptions is called Section 72(t) and there are subsections of 72(t) that have specific circumstances that must be met in order to provide exception to the 10% early withdrawal penalty tax.
Withdrawal Without Penalty Using Early Retirement Exceptions
An early distribution will NOT be subject to the 10% additional early withdrawal tax in the following circumstances:
Age: after participant/IRA owner reaches age 59½
Automatic Enrollment: permissive withdrawals from a plan with auto enrollment features
Corrective Distributions: corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely.
Death: after death of the participant/IRA owner
Disability: total and permanent disability of the participant/IRA owner
Domestic Relations: to an alternate payee under a Qualified Domestic Relations Order
Education: qualified higher education expenses
Equal Payments: series of substantially equal payments
ESOP: dividend pass through from an ESOP
Health Insurance Premium: IRA, not 401(k)
Higher Education Expenses: IRA, not 401(k)
Homebuyers: qualified first-time homebuyers, up to $10,000
Levy: because of an IRS levy of the plan
Medical: amount of reimbursed medical expenses (subject to % limitations), or health insurance premiums paid while unemployed.
Military: certain distributions to qualified military reservists called to active duty
Returned IRA Contributions: if withdrawn by extended due date of return, or earnings on these returned contributions
Rollovers: in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days (also see FAQs: Waivers of the 60-Day Rollover Requirement)
Separation from Service: the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)
SEPP: Substantially Equal Periodic Payments
Please note in some cases there is an exception allowing for penalty free withdrawal from your 401(k) at or after age 55 and after age 50 in even more limited cases. Please consult with a tax professional to get more detailed information on each of these exceptions. It is important that you get advice before you make a decision regarding this specialized area of financial planning. The IRS is unforgiving and the penalties for mistakes are significant.
Would you like an estimate of what your 401(k), TSP, 403(b), 457 plan or IRA will generate using a 72(t) SEPP for early withdrawals to eliminate the IRS penalty? Simply provide: your age, your beneficiaries age, the amount of money in your retirement plan and using the current rates with our 72(t) calculator, we’ll prepare an income estimate for you.