Are There Exceptions to the Early Qualified Retirement Plan Withdrawal Penalty?

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Taking money out early from your qualified retirement plan may trigger an additional tax. Generally, amounts received by a participant from a qualified retirement plan, such as a Defined Contribution plan (this also includes 403(b) plans) or a Defined Benefit plan are taxable distributions and must be reported as ordinary income in the year they’re received. If you’re under age 59 1/2, any distributions received are considered early or premature distributions and are subject to an additional penalty tax equal to 10% of the distribution taxable income. However, the penalty tax does not apply in certain situations. Below is a list of exceptions:

1. Distributions made to the beneficiary or the individual’s estate in the event of the death of that individual.

2. Distributions attributable to the individual’s disability.

3. Distributions that are part of a series of substantially equal periodic payments made (at least annually) for the life or life expectancy of the individual or the joint lives or joint life expectancy of the individual and his or her designated beneficiary beginning after the employee separates from service.

4. Distributions made to an employee after separation from service during or after the year in which the employee attained age 55.

5. Distributions made to an alternate payee pursuant to a qualified domestic relations order (QDRO).

6. Distributions made to an employee for medical care, but not in excess of the amount allowable as a deduction under IRC Sec 213 for amounts during the year for medical care, determined without regard to whether the participant itemizes deductions for the year.

7. Distribution made due to the return of excess contributions from a 401(k) plan.

8. Distributions made due to the return of excess employee or employer matching contributions which is an excess aggregate contribution.

9. Distributions made to reduce an excess elective deferral.

10 Distributions that are dividends paid with respect to stock of a corporation described in IRC Sec. 404(k).

11. Distributions made on account of certain levies against a qualified plan.

12. Distributions that are “qualified reservist distributions” which are distributions made to U.S. military reserve members called to active duty for 180 days or more at any time after September 11, 2001. But reservists have the right to return the amount of any distributions for two years following the end of active duty.

It should be noted that although there are some similarities, the rules regarding the qualified plan exceptions to the additional 10% penalty tax for early or premature distributions are, for the most part, different than those attributable to early or premature distributions from IRAs. Consult with your plan administrator and/or tax advisor as to the best course of action based on your own unique circumstances when considering taking an early qualified plan distribution.