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How to avoid paying the early withdrawal penalty
The Internal Revenue Code penalizes an owner who does not
voluntarily leave the assets in his regular IRA or other retirement plan
until age 59˝ or later. A withdrawal before the date the owner turns
age 59˝ results in an additional tax (over and above any income tax due)
of 10% of the taxable amount of the withdrawal, unless an exception
applies.
Generally, there are no "hardship" exceptions to the 10% additional tax. But
distributions made under the following circumstances are not subject to
the 10% additional tax:
- a distribution made on or
after the date on which the employee turns age 59˝;
- a distribution to a
beneficiary (or to the estate of the employee) on or after the death
of the employee;
- a distribution attributable to
the IRA owner's disability;
- a distribution to pay for
medical expenses in excess of 7.5% of adjusted gross income (AGI)
or to pay for medical insurance (without regard to the 7.5% of AGI
floor) if the individual (including a self-employed individual) has
received unemployment compensation under federal or state law for at
least 12 weeks and the withdrawal is made in the year such
unemployment compensation is received or the following year;
- a distribution made to an
employee after separating from service after attaining age 55 (age 50,
in the case of a distribution to a qualified public safety employee
from a governmental plan);
- a distribution of dividends
paid on certain employer securities;
- a distribution from an IRA on
account of an IRS levy;
- a distribution to pay for
"qualified higher education expenses" of the taxpayer, the taxpayer's
spouse, or any child or grandchild of the taxpayer or the taxpayer's
spouse at an eligible educational institution for the taxable year;
- certain "qualified first-time
homebuyer distributions;"
- a distribution which is part
of a series of substantially equal periodic payments made not less
frequently than annually over the life (or life expectancy) of the IRA
owner or the life (or life expectancies) of the IRA owner and his
beneficiary; and
- a "qualified reservist
distribution" made during the period beginning on the date the
participant was ordered or called to active duty for a period of at
least 180 days (or for an indefinite period) as a member of a reserve
component and ending at the close of the active duty period.
- a "qualified hurricane
distribution" of up to $100,000 from an eligible retirement plan (as
defined in §402(c)(8)(B)) to an individual who sustained an economic
loss by reason of Hurricane Katrina, Rita or Wilma made during the
applicable period ending before Jan. 1, 2007;
- a distribution of excess
contributions, excess deferrals or excess aggregate contributions
- a dividend paid with respect
to stock owned by a tax credit ESOP or an ESOP if a deduction is
allowed to the employer for such dividends;
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