What is Early withdrawal penalty exceptions?
In short
Retirement plan and individual retirement account distributions before age 59½ generally carry a 10% additional tax, but exceptions apply, such as death, disability and substantially equal periodic payments.
Key takeaways
- Leaving an employer in or after the year of turning 55 exempts distributions from that employer's plan, but not from an individual retirement account.
- Individual retirement account-only exceptions include first-time home purchases (up to $10,000) and higher education costs.
- Others include medical expenses above 7.5% of adjusted gross income, birth or adoption ($5,000) and certain emergency withdrawals ($1,000).
Where it's tested
TCP: Retirement Planning Strategies — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
An employee leaves her job in the year she turns 56 and takes a distribution from that employer's 401(k) plan. What is the effect of the 10% early withdrawal penalty?