Wednesday, September 17, 2014

IRA 10% Penalty Exception

I mentioned previously that the 10% early withdrawal penalty does not apply to 401k funds withdrawn in the event of permanent disability.  But it turns out most of retirement funds are in an IRA as a result of a rollover a couple of years ago.  It turns out the same rule applies for an IRA.
Topic 557 - Additional Tax on Early Distributions from Traditional and ROTH IRAs
To discourage the use of IRAs for purposes other than retirement, the law imposes a 10% additional tax on early distributions from traditional and Roth IRAs unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59½. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.
Distributions that you roll over or transfer to another IRA or qualified retirement plan are not subject to this 10% additional tax. For more information on rollovers, refer to Topic 413.
There are exceptions to this 10% additional tax for early distributions that are:
  • Made to a beneficiary or estate on account of the IRA owner's death
  • Made on account of disability

1 comment:

John Richardson said...

Download IRS Publication 590. It is my bible to dealing with questions regarding IRAs for my financial planning clients.