Video:What Is the Penalty for Early Distribution of Retirement Funds?

Transcript:What Is the Penalty for Early Distribution of Retirement Funds?

Hi I am Marc Becker for About.com and today I will speak you about the possible penalties for early distribution of retirement plans.

Penalties for Early Withdrawal on IRAs

There are several forms of individual retirement accounts, also known as IRAs.They all provide tax advantages for retirement savings.Under federal law you will have to pay penalties if you use them before you reach the age of 59 and half.There are a few exceptions, but in most cases you must pay an additional tax of 10% of the taxable amount on the early distribution.

Exceptions for Withdrawal Without Penalties

The following are seven exceptions when you don’t have to pay penalty:You do not have to pay penalty for early distribution:

1. If your portion of unreimbursed medical expenses are more than 7.5% of your adjusted gross income 
2. If you withdraw an amount that is not more than the cost of medical insurance while unemployed 
3. If the IRA early withdrawal is because of the disability or death of the IRA owner.
4. If you set up a SEPP -Substantially equal periodic payments plan regulated by the IRS code section 72(t) and72(q)
5. If withdrawals that are not more than the qualified higher education expenses of the owner or their children or grandchildren
6. If withdrawals are to buy, build, or rebuild a first home. ($10,000 lifetime maximum)
7. If the IRA early withdrawal is used to pay IRS tax levy.

Other Caveats for Early Withdrawal

Still there is a five-year waiting period measured in tax and not calendar years- and only after that you can benefit the above-mentioned exceptions.Some cases you have to pay more than 10%. If you withdraw money form a SIMPLE IRA within the first two years the penalty is 25%.

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