Millions of Americans that save money in their IRAs or qualified plans have no intention of withdrawing that money until after they reach age 59 ½. Unfortunately, there are times when circumstances dictate that this is absolutely necessary. Any number of of misfortunes, such as medical expenses from an uninsured accident or an extended period of unemployment can leave all other sources of liquid assets depleted.
Of course, your retirement assets are probably the last source of assets that you want to draw on in the event of a financial hardship, but at times you may have no choice. At all costs you would like to avoid the 10% early withdrawal penalty inherent in any kind of premature distribution. However, the IRS has allowed for several exceptions to this rule over time, although the rules for traditional and Roth IRAs versus qualified plans differ somewhat. These exceptions can be broken down as follows:
Traditional IRA:
- Death
- Total and permanent disability
- 72(t) distribution (a series of substantially equal and periodic payments)
- IRS levy of the plan
- Medical expenses
- Qualified higher education expenses
- First-time homebuyer expenses up to $10,000
- Health insurance premiums for the unemployed
Roth IRA:
- The same exceptions as for the Traditional IRA, except for the first-time homebuyer exception
Qualified Plans
- All of the exceptions that apply to Traditional IRAs
- Separation from service from your employer at age 55 or later
- Distributions made to your ex-spouse due to a qualified domestic relations order (QDRO)
- Dividend distributions from employee stock ownership plans (ESOPs)
The IRS has allowed these exceptions as both a means of relief and encouragement. The relief comes for the dead, divorced and disabled, while those who are trying to better themselves through education or trying to purchase a home can receive encouragement in the form of penalty-free distributions. Of course, these exceptions fall into a different category than other more common penalty-free transactions, such as rollovers or transfers between accounts or plans.
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