Almost all retirement plans are subjected a particular rate of income tax and early withdrawal may subject it to an extra 10% tax. Typically, an individual draws retirement funds before reaching 59 ½ age are known as premature or early distribution. It is essential for everyone to know 401k: Exceptions to early withdrawal penalty. Financial losses may force you to cash out 401k, but without reaching its withdrawal age, you have to pay 10% withdrawal penalty that has strict exceptions. You can’t use disaster relief as a reason because it will not save you from a penalty.
If you want to avoid withdrawal penalty, you must understand the penalty exceptions for early withdrawal. Here are a few exceptions that will help you to withdraw 401k without any penalty.
Permanently Disable Person
If a person becomes permanently disabled like by an accident or sickness, and this person is incapable of earning money for his/her personal support, he/she can withdraw money without 10% penalty. In this situation, the disabled person must have a certificate to prove his/her mental or physical incapability of working. The certification verifies that these conditions will last for:
If a person passes away before reaching the age limit of 59.5 years, the beneficiaries or state will not apply 10% penalty for early withdrawals on IRAs and IRA.
401k Loan
As per present withdrawal rules of 401k, you can borrow money from 401k without penalty, but you have to pay back these funds with specific interest with 5 years or more. You can get more advantage if you want to purchase your primary residence with the loan amount. This loan provision may not be available for each plan.
Quitting Job After 55 Years of Age
Employees who leave their job after they reach 55 years can withdraw money from retirement plan without any penalty. A qualified safety officer like personnel of government agency, firefighters and police can get the same facility even after quitting a job at the age of 50.
If you want to empty your 401k after changing a job, you can consider rollover 401k to IRA. The rollover allows you to avoid tax and you can get the advantage of tax-sheltered growth for retirement assets.
401k Dividends Distribution for Ownership Plan of Employee Stock
Dividends from ESOP are penalty-free. You can get this advantage only on dividends instead of principle. It is one of the 401k: Exceptions to early withdrawal penalty.
Withdrawal is related to Domestic Relations
A court may order the premature division of 401k plan without any penalty under QDRO of divorce cases. Distribution under QDRO allows you to avoid withdrawal penalty.
Payment of Medical Billing
If you want to cover medical expenses, you can withdraw money from 401k without any penalty. Your unreimbursed health care expenses must exceed 10% (this limit may be 7.5% for a person over 65 years of age) of your yearly income. An unemployed person can pay a premium for health insurance with IRA funds without any penalty.
Military Territorial withdrawal from IRA and 401k
Qualified territorial of the military can withdraw money without penalty. The reservists must call to an active obligation for almost 180 days or even more. An on-duty reservist can avoid 10% penalty.
Tax Levy Exception of Penalty on 401k IRS or IRA
The IRS may levy your possessions, such as retirement account in case of unpaid taxes. With IRS levy on a retirement account, you can get the advantage of penalty-free withdrawal. This rule is an application for IRS levies only instead of personal withdrawals for payment of personal taxes.
Withdrawal from 401k to Pay Fees of Qualified Colleges
It is possible to avoid penalties on different IRA distribution for payment of post-secondary edification expenses like books and students. The students must enroll at the almost half-time board and room. The student may be your spouse, grandchildren, children, or even you. IRA allows you to withdraw money without any penalty to pay your college fee.
401k Withdrawal for Purchase of Home
The first-time homebuyer can withdraw almost $10,000 funds without paying any penalty from IRA for the purchase of his/her home. You may use withdrawal for your child, grandchild, parent, spouse or yourself. The limit of $10,000 is for whole life and all beneficiaries.
It is not right to withdraw money from your retirement plan without an emergency. Even if you know 401k: Exceptions to early withdrawal penalty, you should avoid additional withdrawal of funds. You can take expert advice from a qualified financial advisor before making a financial decision.
