Early Withdrawals from Retirement Plans

Are you considering taking a withdrawal from your retirement? Did you know there are several exceptions to the 10% early withdrawal penalty for IRAs and qualified retirement plans. Here are the main exceptions:

1. First-time home purchase (up to $10,000)

2. Qualified education expenses

3. Unreimbursed medical expenses exceeding 10% of adjusted gross income (7.5% if 65 or older)

4. Health insurance premiums during unemployment

5. Disability

6. Death of the account owner

7. Substantially equal periodic payments (SEPPs)

8. Birth or adoption expenses (up to $5,000)

9. Qualified reservist distributions

10. IRS levy on the retirement plan

Starting January 1, 2024, two new exceptions will be added:

11. Emergency personal expense distributions

12. Domestic abuse victim distributions

It's important to note that while these exceptions may waive the 10% penalty, the distribution may still be subject to income tax.

**Roth IRA distributions of your original contributions or principal are not taxable and do not incur a 10% early withdrawal penalty, regardless of your age. This is a key feature of Roth IRAs that distinguishes them from Traditional IRAs.Here are the important rules to know:

1. Contributions can be withdrawn tax-free and penalty-free at any time.

2. The ordering rules for Roth IRA distributions state that contributions are withdrawn first, then conversions, and finally earnings.

3. Only earnings may be subject to taxes and penalties if withdrawn early and not meeting qualified distribution criteria.

To ensure your distribution is non-taxable:

1. Verify that the amount withdrawn does not exceed your total contributions to the Roth IRA.

2. Keep accurate records of your contributions to demonstrate that you're only withdrawing principal.

3. Be aware that even if the distribution is tax-free, you may still need to report it on your tax return using Form 8606.

Remember, while you can withdraw contributions without penalty, it's generally advisable to keep funds in your Roth IRA for retirement if possible, to take advantage of tax-free growth potential.

Always consult with a tax professional to understand the full implications of early withdrawals from retirement accounts.