10 September 2010
Are you subject to a penalty?

If you take a distribution from a qualified retirement plan before reaching age 59½, it is considered an early distribution and is generally taxable and subject to an additional 10-percent penalty. There are some exceptions for distributions that are:
  • Due to death.
  • Due to the account owner’s disability.
  • Substantially equal periodic payments.
  • Due to separation from service after age 55 (employer-provided plan only).
  • Due to the extent medical expenses exceed 7.5 percent of adjusted gross income.
  • On account of an IRS levy.
  • Under a qualified domestic relations order (employer-provided plan only).

Note: Hardship is not one of the exceptions. It’s simply a means to take an early distribution from a 401(k) or other type of employer plan.

Some exceptions only apply to early distributions from an IRA, including:
  • Health insurance related distributions to the unemployed.
  • Distributions taken for qualified higher education expenses.
  • Distributions taken for first-time home purchases.

If you take an early distribution from an IRA to pay qualified higher education expenses, the 10-percent penalty does not apply. However, if you take an early distribution from a 401(k) for the same purpose, the penalty does apply. You can avoid the penalty if you roll over the distribution from the 401(k) into an IRA first and then take a distribution from the IRA. It’s best to seek the advice of a tax professional before taking a distribution from any retirement plan.
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Topic: Advice