Clawson & Pelerin

440 W. Jubal Early Drive Suite 220
Winchester, Virginia 22601

16 Gaylord Lane
Marlton, NJ 08053

(540) 662-4642

833-Pelerin (833-735-3746)

What happens if I withdraw money from my tax-deferred invest

Withdrawing taxable funds from a tax-deferred retirement account before age 59½ generally triggers a 10% federal income tax penalty, on top of any federal income taxes due. However, there are certain situations in which you are allowed to make early withdrawals from a retirement account and avoid the tax penalty. Check your specific plan provisions to see whether a particular withdrawal option is available.

IRAs and employer-sponsored retirement plans have different exceptions, although the rules are similar.

IRA exceptions

The following distributions are not subject to the 10% penalty tax:

  • Death of the IRA owner: Distributions to your designated beneficiaries after your death. (Beneficiaries are subject to annual required minimum distributions.)
  • Disability distributions: Distributions made due to your qualifying disability.
  • Unreimbursed medical expenses: Distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your adjusted gross income in a calendar year. (You don't have to itemize deductions to use this exception, and the distributions don't have to actually be used to pay those medical expenses.)
  • Medical insurance Distributions: made to pay for health insurance if you've 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 paying the 10% penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
  • Qualified higher-education expenses: Distributions made for you and/or your dependents.
  • First home purchase: Up to $10,000 (lifetime limit) can be withdrawn tax-free for purchase of a first home.
  • Qualified reservist distributions: Certain distributions to qualified military reservists called to active duty.

Employer-sponsored plan exceptions

The following distributions are not subject to the 10% penalty tax:

  • Death of the plan participant: Upon your death, your designated beneficiaries may begin taking distributions from your account. Beneficiaries are subject to annual required minimum distributions.
  • Disability distributions: 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/deferrals: Distributions made to correct excess contributions you or your employer made to the plan over the allowable limits.
  • Qualified reservist distributions: (see above).

If you plan to withdraw funds from a tax-deferred account, make sure to carefully examine the rules on exemptions for early withdrawals. For more information on situations that are exempt from the early-withdrawal income tax penalty, visit the IRS website at www.irs.gov.

 

This information is prepared by an independent third party, Broadridge Investor Communication Solutions, Inc. and is provided for informational and educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. This information is not meant to be a complete summary or statement of all available data necessary for making financial or investment decisions and does not constitute a recommendation.

Please note that the information provided may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Waddell & Reed, Inc., nor its Financial Advisors give tax, legal, or accounting advice.

This information is not meant as financial or investment advice pertaining to your personal situation. The selection of appropriate investment, insurance or planning options and/or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. Nothing contained herein is intended as a solicitation or an offer to buy or sell any product or service mentioned and they may not be suitable for all investors.

Securities offered through Waddell & Reed, Inc., Member FINRA/SIPC, are not insured by FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financial institution, and are subject to risks, including the possible loss of principal. Insurance products are offered through insurance companies with which Waddell & Reed has sales arrangements. Guarantees provided by insurance products are subject to the claims-paying-ability of the issuing insurance company.

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