Q: Last week you answered my question about doing a rollover from my 401(k) plan to an IRA. You said that if I am under 59½ and withdraw money from my retirement plan I would pay a penalty in addition to taxes unless I meet certain exceptions. What are those exceptions?
A: The penalty for taking an early distribution from your retirement account if you are under age 59½ is an additional income tax of 10percent added to the regular tax you would pay on the distribution. The 10percent additional tax does not apply to the following payments from your retirement plan:
1. Payments made after you separate from your job if you will be at least 55 in the year of your separation.
2. Payments that start after you separate from your job if they are paid at least annually in equal or close to equal amounts over your life or life expectancy or the joint lives or joint life expectancy of you and your beneficiary.
3. Payments from a government defined benefit pension plan made after you leave your job if you are a public safety employee and you are at least 50 in the year you separate from service
4. Payments made due to disability.
5. Payments of Employee Stock Ownership Plan dividends.
6. Corrective distributions of contributions that exceed tax law limitations.
7. Cost of insurance paid by your retirement plan.
8. Withdrawals of contributions made under special automatic enrollment rules pursuant to your request within 90 days of
9. Payments made directly to the government to satisfy a federal tax levy.
10. Payments made to a former spouse under a qualified domestic relations order (QDRO).
11. Payments up to the amount of your deductible medical expenses.
12. Certain payments made while you are on active duty if you were a member of a reserve component of the Armed Forces called to duty after Sept. 11, 2001 for more than 179 days.
13. Payments of certain automatic enrollment contributions requested to be withdrawn within 90 days of the first contributions.
Q: If I roll over my retirement plan to an IRA and then withdraw money before I reach age 59½, will the 10 percent penalty apply?
A: Yes, unless an exception applies. The exceptions for an IRA are the same as those listed above except as follows:
1. There is no exception for payments after separation from sevice that are made after age 55.
2. The exception for a QDRO does not apply. There is a special exception for IRAs that allows you to make a tax-free transfer directly to an IRA of a spouse or former spouse as part of a divorce or separation agreement.
3. The exception for payments made at least annually in equal or close to equal amounts over a specified period applies without regard to whether you have had a separation from your job.
4. There are additional exceptions for payments for qualified educational expenses, payments of up to $10,000 that you use to make a qualified first-time home purchase, and payments after you have received unemployment compensation for 12 consecutive weeks (or if you are were self-employed and otherwise would have been eligible to receive unemployment compensation).
Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth, Inc., in Monterey. Send questions concerning investing, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or firstname.lastname@example.org.