Is the 10% Penalty on Early Withdrawal Waiver For 2022?
Savers who keep their retirement savings in tax-advantaged accounts such as individual retirement accounts or employer sponsored plans like 401(k)s typically incur a 10% penalty when withdrawing funds prior to age 59 1/2, although there may be exceptions under certain circumstances. The IRS also provides relief.
One is for payments over time (known as 72(t) distributions) while another provides for expenses associated with total and permanent disability or leaving service for another job.
1. You’re Over Age 59-1/2
Typically, if you withdraw money from a retirement account prior to turning 59-1/2, the IRS assesses a 10% penalty in addition to ordinary income tax on the distribution.
The SECURE Act 2.0 passed by Congress in 2022 established new exceptions to the 10% early withdrawal penalty imposed upon many tax-deferred accounts, such as IRAs and employer plans such as 401(k)s and 403(b). These exceptions are often known as 72(t) exceptions after their section in the tax code.
Substantial Equal Period Payments (SEPPs) is one popular exception to the 59-1/2 rule, as it allows you to avoid penalty tax by taking annual annuity-like withdrawals over five years or until age 59-1/2 whichever comes first. But there are a number of other variations which allow for potential savings opportunities that allow for unexpected needs while maintaining long-term goals.
2. You’re Leaving Your Job
Making the decision to leave your job can bring up many emotions, even if the move is 100% right for you. From dealing with bad culture or an unpleasant boss to feeling dissatisfaction about your role itself, leaving can be hard on both body and mind.
If you’re thinking about leaving, take time to evaluate your motivations before making an informed decision. If staying is what’s right for you, have an open conversation with your manager about ways you can overcome obstacles and find greater fulfillment within your role.
If you decide to quit, be sure to inform your supervisors in person and submit a formal resignation. Also make sure you gather up any files or materials needed for future roles before leaving and clean out your desk and computer. Some employers may offer to help smooth out your exit by helping with transition projects or training a replacement employee.
3. You’re Taking a Required Minimum Distribution
RMDs (required minimum distributions) are mandated by the IRS as annual withdrawals from your retirement accounts after reaching certain ages, typically traditional IRAs and employer-sponsored plans such as 401ks, 403bs, 457bs etc.
Your RMD is calculated based on life expectancy tables provided by the IRS and will change each year based on how much money has accumulated in your accounts and your age. Proper calculation of RMDs is important as they count toward your taxable income.
Failing to withdraw your RMD by the deadline incurs a penalty equivalent to 25% of what wasn’t taken out on time; under Secure 2.0 Act regulations this amount has been reduced to 10% for IRA owners.
4. You’re Taking a Distribution to Cover Unreimbursed Medical Expenses
When medical bills exceed 7.5% of your adjusted gross income and become financially inaccessible, using your retirement accounts might be your only viable solution. A temporary waiver from the IRS allows withdrawals without penalty to cover such qualified medical expenses.
As long as you can prove total and permanent disability, the 10% penalty may be waived; typically this requires proof from Social Security disability payments as well as doctor reports. IRS Form 5329 details how to claim this exemption; it also covers other tax-favored withdrawals from IRAs or tax-deferred accounts such as Roth IRAs. It’s wise to review your plan’s summary plan description (SPD), which will outline any rules or penalties associated with early withdrawals.
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