How Can I Avoid the 10% Early Withdrawal Penalty on IRA’s?

You’re 50 years old. You worked your way up the corporate ladder and built a large nest egg in your IRA and company retirement plan. You are contemplating retirement, but if you take distributions from your retirement plan before age 59 ½ the 10% early withdrawal penalty will apply. Correct?

The answer is maybe. There are several exceptions to the 10% penalty; if the distributions are used to pay for higher education expenses, health insurance premiums, or first-time home purchases, the penalty does not apply.

As in the example above, when a taxpayer is under age 59 ½, the 10% early withdrawal penalty can be avoided if the IRA or qualified plan distributions are part of a scheduled series of substantially equal periodic payments (SEPPs) made over the life expectancy of the participant and the beneficiary. These periodic payments must be made on at least an annual basis. Another exception may be available, for qualified plans only, if you are age 55.

If you are contemplating IRA withdrawals for any reason and think you may be subject to the 10% early withdrawal penalty, contact Anders or your tax consultant to discuss the rules related to the periodic payments exception.