The No Penalty Zone

One of the best things about saving for retirement in an employer’s qualified retirement plan or an individual retirement account (IRA) is that you generally won’t be able to access the funds without penalty until you’re near retirement age. That means your account balance has the potential to grow for many years before you start making withdrawals.

To discourage you from dipping into your tax-deferred savings before retirement, the IRS generally imposes a 10% penalty on withdrawals made before age 59½. But what if you need a substantial amount of cash before then? Under certain circumstances, early withdrawals may qualify for an exception to the penalty.

Qualified Plansand IRAs

Early withdrawals from both IRAs and qualified plans, such as 401(k) plans, may be allowed without penalty for the following reasons:

• An account owner’s death or disability


• To pay unreimbursed medical expenses, which generally must exceed 10% of your adjusted gross income


• Substantially equal periodic payments (SEPPs) made over your lifetime or the lifetimes of you and abeneficiary

Only for IRAs

IRA owners may also be able to take penalty-free early withdrawals to pay:

First-time home buying expenses of up to $10,000 (lifetime cap) for the costs of buying, building, or rebuilding a principal residence for yourself and/or your spouse, or a child, grandchild, or ancestor of you or your spouse

Qualified higher education expenses for you, your spouse, or a child or grand-child of you or your spouse

Health insurance premiums if you’re unemployed and meet certain requirements

Only for Qualified Plans

Early withdrawals from a qualified plan are not subject to penalty when the distribution is made:

• After your separation from service with your employer, provided your separation from service occurs during or after the calendar year in which you attain age 55


• To a former spouse under a qualified domestic relations order

Certain other penalty exceptions apply. The rules are complex, so consult your tax advisor before taking an early withdrawal.

FR2017-0504-0006/E