IRAs vs. 401(k)s: Different exceptions to the 10% penalty for withdrawals under age 59

There is a lot of confusion about the 10% penalty that the IRS imposes on early distributions from retirement plans. Most people know that this penalty exists for those who withdraw tax-deferred retirement funds before age 59½, though many people don’t realize that it’s on top of whatever your current tax rate is. Is.

Many people have also heard that there are exceptions to the 10% penalty, although they almost never fully understand what those exceptions are and when they are enforced.

Today we’ll explain when and where these exceptions are applied for early withdrawal penalties by breaking down distributions into three separate groups: traditional IRAs, retirement plans other than IRAs, and finally a group that includes both IRAs. And retirement plans.

Exceptions to the 10% penalty – only for IRAs

The penalty exceptions for a traditional IRA are the ones most people have heard of, but they often assume they apply to any type of plan, which is not necessarily the case. The following exceptions are limited to traditional IRAs. These exceptions do not apply to 401(k)s, 403(b)s or other tax-deferred retirement plans:

  1. a buying a home for the first time – First-time homebuyers can withdraw up to $10,000 for a down payment (and up to $10,000 for the purchase if your spouse also has an IRA and qualifies as a first-time homebuyer) can also be removed).
  2. Buying health insurance – If you lost your job and accumulated unemployment for at least 12 weeks in a row.
  3. Paying for the expenses of higher education – for yourself, spouse, children or grandchildren.

Exceptions to the 10% penalty – for 401(k)s and similar retirement plans

Qualified retirement plans, such as 401(k)s, 403(b)s, profit-sharing plans and Keogh plans, offer a few more options than IRAs to avoid the 10% early withdrawal penalty, including: :

  1. a . Division of retirement account assets in divorce under Qualified Domestic Relations Order (QDRO),
  2. 457(b) distributions from government plans, excluding distributions due to rollover from any other type of plan or IRA.
  3. Distributions to those 50 or older for public safety workers who retire from service.
  4. Distribution in other areas to those 55 or older who are withdrawing from service.
  5. “Phased” distributions from federal plans. A phased retirement option allows employees at or near retirement age to reduce their working hours to part-time, receive benefits and earn additional money.

Exceptions that apply to both IRAs and 401(k)s . apply to

Some exceptions may apply to both IRAs and retirement plans, and they include:

  1. Eligible Reservists – Have been called to active duty for at least 179 days, or indefinitely because you are a reserve member.
  2. Disability – Must meet the IRS definition of complete and permanent disability and obtain documentation from a doctor.
  3. Death of the account owner.
  4. IRS Tax Levy – You don’t have to pay a penalty if the IRS attracts you to collect unpaid federal taxes on your account. However, if you make an early withdrawal to pay the tax bill yourself, the exception does not apply and you will be charged a 10% penalty.
  5. Medical expenses (to the extent that they exceed 10% of your adjusted gross income).
  6. Adoption or giving birth to a child – Withdrawals of up to $5,000 can be made penalty-free in the first year.
  7. fairly equal pay (aka 72

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