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Frequently Asked Questions

Glossary of Retirement Terms

When is a 401k Distribution Not Subject to the 10% Penalty?

    
There are only a couple of situations where the IRS will waive the 10% 401k early withdrawal penalty, i.e., a withdrawal prior to the participant reaching age 59½.

  • Amount of your unreimbursed medical expenses greater than 7.5% AGI ( IRC §72(t)(2)(B) ).
  • There is a Qualified domestic Relations Order (QDRO) from the courts that mandate funds from your account go to a former spouse, child, or dependent ( IRC §72(t)(2)(C) ).
  • You have separated from service and were at least 55 years of age when you did so (or separated from service in the year in which you turned 55) ( IRC §72(t)(2)(A)(v) and 72(t)(10) ).
  • You have elect a Section 72(t) distribution.
  • You are totally disabled. (The key to the disability exception seems to lie in the permanence of the condition, not the severity. Therefore, to claim this exemption you have to furnish not only information proving that you are totally disabled, but also information on the permanence of the disability.) ( IRC §72(t)(2)(A)(iii) )
  • You have died and your beneficiary gets the money ( IRC §72(t)(2)(A)(ii) ).
  • You have made contributions under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment ( IRC §414(w)(1)(B) ).
  • Certain distributions to qualified military reservists called to active duty (IRC §72(t)(2)(G) )
  • Because of an IRS levy of the plan ( IRC §72(t)(2)(A)(vii) )
  • Certain corrective distributions

You should also consider taking a loan or hardship withdrawal from your plan.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

 


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