Exclusions for the 10% Penalty on Pension Withdrawal

These are some exclusions for the 10% penalty when withdrawing funds from an IRA and 401 K distributions.

I have had quite a few people call me on this recently and thought I would post this great breakdown from Jennings Seminar.

It has some little known exclusions that may help you. PLEASE remember that not all exclusions apply to BOTH the IRA and the 401K, many exclusions are for one or the other.

Sincerely, Deborah Sherwood, EA

The Penalty Exceptions of IRC Section 72(t)
1Disability of the participant
Must meet the meaning described
2 Series of Substantially equal payments
Annual distributions based on approved calculation. For qualified plans taxpayer must
separate from service
3 Separation from service
Must be 55, does not apply to IRAs or self employed individuals
4Equal to or less than deductible medical expenses
Medical expenses must exceed 7.5% of AGI
5Unemployed health insurance
Applies only for IRAs
Payments received for at least 12 weeks
Limited to health insurance paid
6Higher education of taxpayer, spouse, kids or grandkids
Applies only to IRAs

7 1st time home purchase of taxpayer, spouse, child or grandchild
Applies only to IRAs
120 day time limit
$10,000 lifetime limit
8 Loan agreements
Qualified plans only
9Death
All beneficiaries qualify
10 Dividends to ESOP participants
Must meet dividend deduction rules for ESOP’s
11 Federal tax levy
Must be IRC Section 6631 levy
12 QDRO order
Divorce decree, does not apply to IRAs
13 Federal retirees with lump sum and reduced annuity
Must be 55
14 Rolled over within 60 days of distribution
IRS may waive the 60 day rule in the event of hardship
15 Correct excess contributions
Applies to 401ks and IRAs primarily
16 Conversion from traditional to Roth
Many traps still exist
17 Hurricane Katrina distributions
$100,000 lifetime limit
18 Public safety officers separated from service
Over age 49
19 Reservists called to active duty
Must be on active duty more than 179 days