I take a distribution from an IRA without penalty?You are
eligible to take a distribution without penalty from an IRA, 401(k), 403(b),
etc. at age 59 1/2. Generally, distributions prior to age 59 1/2 will be assessed a premature distribution penalty, but there are several exceptions to this. They include:
first-time home purchase
4. higher education expenses
|8. IRS Levy
|9. Individuals called to active duty
|10. Presidential disaster relief
|11. To the beneficiary of a deceased owner
What is a 72(t) distribution?
of the Internal Revenue Code allows you to begin receiving money from your
retirement accounts before you turn age 59 1/2 without the normal 10%
premature distribution penalty. The rules for 72(t) distributions require
you to receive Substantially Equal Periodic Payments (SEPP) based on your
life expectancy to avoid a 10% premature distribution penalty on any
amounts you withdraw. Payments must last for five years (the five-year
period does not end until the fifth anniversary of the first distribution
received) or until you are 59 1/2, whichever is longer. The SEPP can be
calculated in one of three IRS-approved ways, and the rules surrounding 72(t) distributions are
very complex. It is best to contact us
to further discuss taking an early distribution under Internal Revenue
Code Section 72(t). We can be reached at (800) 434-4015.
How long do I have to roll over a retirement plan distribution?
complete the rollover by the 60th day following the day on which you
receive the distribution. The IRS may waive the 60-day requirement where failure to do
so would be against equity or good conscience, such as in the event of a
casualty, disaster, or other event beyond your reasonable control.
However, we strongly recommend a "direct rollover," where the 401(k)
custodian sends the check directly to the IRA custodian so that the check
is not lost or misplaced. With a direct rollover, there is no 60-day period, and mandatory tax
withholding doesn't take place.
What are Required
requires that you withdraw at least a minimum amount, known as a Required
Minimum Distribution, from your retirement accounts annually, starting
the year you turn age 72. The amount of the distributions is based on
your life expectancy and the life expectancy factor for the calculation can be obtained from the appropriate IRS Tables. It's
very important to calculate your Required Minimum Distribution correctly,
as the penalty is 50% of the amount that should have been distributed.
What will happen
to my Social Security Benefits?
of higher tax rates in the future, it may make sense to consider a Roth IRA,
which is funded with after-tax money. If you believe tax rates will be
higher in the future, a Roth IRA can hedge against higher tax rates down
the road. Unlike a Traditional IRA, distributions from a Roth IRA are tax-free if certain requirements are met.
Can an IRA be rolled over into a qualified retirement plan such as a
An IRA can be
rolled over into a qualified retirement plan, assuming the qualified
retirement plan permits such rollovers.
Under what circumstances can a participant take a hardship distribution from a retirement plan?
plan may, but is not required to, provide for hardship distributions. A
hardship distribution is one that is made while the participant is still
an active employee. The employee must have an immediate and heavy
financial need, have exhausted all other income sources, and use the
distribution to satisfy the need.
If a 401(k)
plan provides for hardship distributions, it typically limits the reason
for the distribution to the IRS safe harbors: medical expenses, purchase principal residence,
educational expenses, and to prevent eviction or foreclosure. In determining the existence of
a need and of the amount necessary to meet the need, the plan must specify
and apply nondiscriminatory and objective standards. While a hardship
provision does provide flexibility, participants must be aware that these
distributions are assessed income tax and a 10% penalty, and contributions to
the plan must cease for six months following the distribution.
distributions allowed from an IRA?
There is generally no limit on when an IRA owner may take a distribution
from his or her IRA, although there may be unfavorable tax consequences,
such as an additional 10% tax on early distributions. However, for certain
distributions from an IRA, those being death, disability, first-time home
purchase, higher education expenses, health insurance, medical expenses,
and 72(t) distributions, the 10% penalty is waived.
Can I withdraw funds penalty-free from my 401(k) to purchase my first
Depending on the
rules for your 401(k) plan, you may be able to borrow money from your
401(k) plan to purchase your first home. Your plan administrator can tell
you if the plan has a loan policy and should have written information that
explains when you can borrow funds from your 401(k) plan as well as other
Can I roll over my 401(k) to an IRA and use the money to purchase my first home?
Yes, if you are
receiving a distribution from a 401(k) that is eligible to roll over into
an IRA and you meet all of the qualifications for an IRA distribution for
a first-time homebuyer. The most important qualifications being that you
had no present ownership interest in a principal residence during the
two-year period ending on the date of this acquisition, the distribution
is used directly for the cost of acquiring the property, and the aggregate
lifetime limit is $10,000.
Stifel Independent Advisors and Stifel do not offer tax advice. You should consult your tax advisor regarding your particular situation.