Normally, if a taxpayer receives a distribution from a qualified retirement plan before the age of 59½, an early distribution penalty of 10% of the taxable amount will be assessed on the taxpayer in the year the distribution occurred. This tax is in addition to any regular income tax, resulting from the distribution being included in your income for that year. However, there are certain retirement distributions that may not be subject to the 10% early withdrawal penalty. Some of the most interesting or common exceptions are:
- Distributions made to a beneficiary (or to the estate of the taxpayer) on or after the death of the taxpayer.
- Distributions made to pay unreimbursed medical expenses.
- To qualify for this exception, the taxpayer can only take into account unreimbursed medical expenses that would be included in figuring a deduction for medical expenses on Schedule A, Itemized Deductions.
- Even then, the amount of the distribution excluded from the 10% penalty cannot be greater than the total amount of unreimbursed medical expenses, minus 7.5% of your adjusted gross income. (Although this is the amount that would be included in your itemized deductions, you are not required to itemize to take advantage of this exception.)
- Distributions made if you are disabled.
- You are considered disabled if a physician determines that you cannot do any substantial gainful activity, because you have a physical or mental condition.
- Distributions made to pay for medical insurance for yourself, your spouse and your dependents.
- To qualify for this exception, four conditions must apply.You must:
- have lost your job;
- received unemployment compensation for at least 12 weeks;
- received the distribution either the same year or the following year after you received the unemployment compensation, and
- you must have received the distribution no later than 60 days after becoming re-employed.
- To qualify for this exception, four conditions must apply.You must:
- Distributions to pay for qualified higher education expenses.
- The education must be for you, your spouse, or the children or grandchildren of you or your spouse.
- Qualified higher education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance of the student at an eligible educational institution.
- In addition, if the individual is at least a half-time student, room and board expenses are also considered qualified higher education expenses.
- Distributions made to buy, build or rebuild a first home.
- To qualify for treatment as a first-time homebuyer distribution, you must meet the following three requirements:
- It must be used to pay acquisition costs of a first home within 120 days after being received; cannot be more than $10,000, and
- it must be used to pay qualified acquisition costs for the main home of a first-time homebuyer who is yourself, your spouse, or a child, grandchild, parent or ancestor of you or your spouse.
- To qualify for treatment as a first-time homebuyer distribution, you must meet the following three requirements:
These exceptions can provide a valuable tax-planning opportunity if your situation fits any of these categories. There are also other exceptions to the 10% penalty that have not been mentioned. For more information, visit http://www.irs.gov/ or contact Henssler Financial 770-429-9166 or experts@henssler.com. We will be happy to determine if your situation will allow you to take advantage of these exceptions.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
