Retirement Topics – Exceptions to Tax on Early Distributions

Retirement Topics – Exceptions to Tax on Early Distributions

Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax.

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.

Exception to 10% Additional Tax

Криптовалюта Глизе

ExceptionThe distribution will NOT be subject to the 10% additional early distribution tax in the following circumstances:Qualified Plans
(401(k), etc.)
IRA, SEP, SIMPLE IRA* and SARSEP PlansInternal Revenue Code Section(s)
Ageafter participant/IRA owner reaches age 59½yesyes72(t)(2)(A)(i)
Automatic Enrollmentpermissive withdrawals from a plan with auto enrollment featuresyesyes for SIMPLE IRAs and SARSEPs414(w)(1)(B)
Corrective Distributionscorrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timelyyesn/a401(k)(8)(D),
401(m)(7)(A),
402(g)(2)(C)
Deathafter death of the participant/IRA owneryesyes72(t)(2)(A)(ii)
Disabilitytotal and permanent disability of the participant/IRA owneryesyes72(t)(2)(A)(iii)
Domestic Relationsto an alternate payee under a Qualified Domestic Relations Orderyesn/a72(t)(2)(C)
Educationqualified higher education expensesnoyes72(t)(2)(E)
Equal Paymentsseries of substantially equal paymentsyesyes72(t)(2)(A)(iv)
ESOPdividend pass through from an ESOPyesn/a72(t)(2)(A)(vi)
Homebuyersqualified first-time homebuyers, up to $10,000noyes72(t)(2)(F)
Levybecause of an IRS levy of the planyesyes72(t)(2)(A)(vii)
Medicalamount of unreimbursed medical expenses (>10% AGI for 2021, >7.5% AGI; for 2017 – 2020)yesyes72(t)(2)(B)
Medicalhealth insurance premiums paid while unemployednoyes72(t)(2)(D)
Militarycertain distributions to qualified military reservists called to active dutyyesyes72(t)(2)(G)
Returned IRA Contributionsif withdrawn by extended due date of returnn/ayes408(d)(4)
Returned IRA Contributionsearnings on these returned contributionsn/ano408(d)(4)
Rolloversin-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)yesyes402(c), 402A(d)(3), 403(a)(4), 403(b)(8), 408(d)(3), 408A(d)(3)
Separation from Servicethe 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)**yesno72(t)(2)(A)(v),
72(t)(10)

Nonqualified 457(b) plans: Governmental 457(b) distributions are not subject to the 10% additional tax except for distributions attributable to rollovers from another type of plan or IRA.

*SIMPLE IRA distributions incur a 25% additional tax instead of 10% if made within the first 2 years of participation

**Qualified public safety employees

Effective for distributions after December 31, 2015, the exception for public safety employees who are age 50 or over is expanded to include specified federal law enforcement officers, customs and border protection officers, federal firefighters and air traffic controllers. Also, the restriction that only defined benefit plans qualify for the exemption is eliminated. Thus, an exemption is allowed for distributions from defined contribution plans or other types of governmental plans, such as the TSP. See IRC Section 72(t)(10), as amended by the Defending Public Safety Employees’ Retirement Act, P.L. 114-26.