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Penalty Pointers

If you’re saving for retirement in a qualified plan sponsored by your employer, such refereeas a 401(k), or in a traditional individual retirement account (IRA), you need to remember that the IRS generally imposes a 10% penalty on any withdrawals you make before you turn age 59½.* This penalty is in addition to any income taxes due on the withdrawal. However, there are several exceptions that may apply.**

Disability or Death

Both qualified retirement plans and IRAs allow penalty-free distributions in cases of disability or death. “Disability” generally means that the individual is unable to engage in any “substantial gainful activity.”

Unreimbursed Medical Bills

Withdrawals from an IRA or a qualified retirement plan to pay deductible medical expenses that exceed 10% of adjusted gross income may be penalty free. The withdrawal must occur in the same year the expenses are paid.

Health Insurance Premiums

You can make penalty-free withdrawals from an IRA to pay health insurance premiums if you have received unemployment compensation for at least 12 weeks (or could have except for being self-employed).

First-Time Homebuyer Expenses

You can withdraw up to a maximum of $10,000 penalty free from your IRA to buy, build, or rebuild a principal residence for an eligible first-time homebuyer. (The buyer can be yourself, your spouse, or any child or grandchild of you or your spouse, provided the buyer and his/her spouse have not owned another principal residence for at least two years.) This is a lifetime limit.

Higher Education Expenses

You may make penalty-free withdrawals from your IRA to pay qualified higher education expenses for you, your spouse, or any children or grandchildren of you or your spouse.

Equal Payments

Withdrawals from an IRA or qualified retirement plan that are part of a series of substantially equal periodic payments over your lifetime or the lifetimes of you and the designated beneficiary may be penalty free. (Requirements apply.)

* A 10% penalty may also apply to taxable distributions taken from a Roth IRA prior to the owner turning 59½, but a different set of rules applies.

** The list presented is not all-inclusive.

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