What happens if I
withdraw money from my tax deferred investments before age 59½?
Generally, withdrawing from a tax deferred retirement
account before age 59 ½ triggers a 10% federal income tax penalty on top of any
other federal income taxes due. However, there are certain situations where you
can make early withdrawals from a retirement account and avoid the tax penalty.
Before we list the types of distributions, please note that you should check
your specific plan to ensure that such withdrawals are allowed.
IRAs and employer sponsored retirement plans have various
exceptions though the rules are generally similar.
IRA Exceptions
- Death of the IRA owner: distribution to your designated beneficiaries after your death (beneficiaries are subject to annual required minimum distributions).
- Disability: distributions can be made due to a qualifying distribution.
- Unreimbursed medical expenses: distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your gross income in a calendar year.
- Medical insurance: distributions made to pay for health insurance if you lost your job and are receiving unemployment benefits.
- Substantially equal periodic payments (SEPPs): Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You must withdraw funds at least annually based on one of three rather complicated IRS-approved distribution methods. You generally can't change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do, you'll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
- Qualified higher education expenses: these distributions can be made for you and/or dependents.
- First home purchase: this distribution can be up to $10,000 (lifetime limit).
- Qualified reservice distributions: certain distributions to qualified military called to active duty.
Employer Sponsored Plan Exceptions
- Death of the plan participant: upon your death, your designated beneficiaries may begin taking distributions from your account. Beneficiaries are subject to annual minimum required distributions.
- Disability: distributions made due to your qualifying disability.
- Part of a SEPP program (see above): distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You generally cannot modify the payments for a period of five years or until you reach age 59½, whichever is longer.
- Attainment of age 55: distributions made to you upon separation of service from your employer. The separation must have occurred during or after the calendar year in which you reached the age of 55 (age 50 for qualified public safety employees).
- Qualified Domestic Relations Order (QDRO): payments made to an alternate payee under a QDRO.
- Medical care (see above): distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your adjusted gross income in a calendar year.
- To reduce excess contributions: distributions made to correct excess contributions you or your employer made to the plan over the allowable amount.
- To reduce excess elective deferrals: distributions made to reduce amounts you deferred over the allowable limit.
- Qualified Reservist Distributions (see above).
To learn more about withdrawing before age 59½ click here,
or for personalized attention, feel free to call the office at 201-342-3300.
One of our associates will be happy to speak to you.
