Exceptions to the Retirement Withdrawal Penalty

The government does not want you to withdraw money from your IRAs and other retirement accounts before age 59 1/2. To deter early withdrawals, the government imposes a 10 percent penalty tax, in addition to regular income tax in the case of tax-deferred accounts.

If you are looking to withdraw from your retirement account before age 59 1/2, there are ways to do so without penalty. There are new exceptions in place by the SECURE 2.0 Act established in late 2022.?

No penalty will ever be due on early distributions from your 401(k) or other qualified plans if you leave your job the year you turn 55 or later. But this exception does not apply to IRAs (traditional, Roth, SEP, or SIMPLE IRAs).

You can withdraw funds penalty-free from your IRA before age 59 1/2 if you take substantially equal periodic payments for at least five years or until you turn age 59 1/2. You can calculate this under the assumption that you will withdraw your entire retirement plan either throughout your life or throughout the lives of you and your beneficiary.

You may withdraw any amount penalty-free if you become disabled before age 59 1/2. The law allows penalty-free withdrawals to pay for medical expenses or medical insurance, but only to the extent such costs exceed 7.5 percent of your adjusted gross income.?

You can withdraw penalty-free up to $5,000 to pay for birth or adoption expenses. As well as to pay for higher education expenses, to pay for medical insurance if you become unemployed or, to purchase or build a first home for yourself or certain family members—subject to a $10,000 lifetime limit.

If you have any questions about early retirement account withdraws other tax questions, please call me on my direct line at (817) 383-0927 or book a complementary strategy session here.

Sincerely,

The Francis and Reeves Advisory Team