Avoid Penalties by Meeting Requirements for Early Retirement Plan Withdrawals

– Early retirement plan distributions before age 59½ are generally subject to income tax and a 10% penalty tax.
– However, there are exceptions to the penalty tax, such as paying for medical costs that exceed 7.5% of adjusted gross income, taking annuity-like annual withdrawals, using withdrawals for qualified higher education expenses, and taking withdrawals for qualified first-time homebuyers.
– The rules for avoiding the penalty tax are complex, and failure to meet the requirements will result in paying the penalty. 1. The U.S. Tax Court ruled that a taxpayer who took a retirement plan distribution of $19,365 before reaching age 59½ didn’t qualify for an exception due to disability.
2. The taxpayer’s diabetes diagnosis and treatment with insulin shots and other medications did not meet the criteria for total and permanent disability for the withdrawal.
3. The court upheld a federal income tax deficiency of $4,899 for the taxpayer.
4. It’s important to seek guidance to determine if one is eligible for any exception to the 10% early withdrawal penalty tax.

Retirement Plan Early Withdrawals: Make Sure You Meet the Requirements to Avoid a Penalty