Birth or Adoption
Beginning in 2020, the SECURE Act adds a new 10% penalty exception for births or adoptions. It is limited to $5,000 for each birth or adoption. To qualify, the distribution must be taken within one year from the date of birth or when the adoption in finalized.
First Home Purchase
If an individual takes a distribution from their IRA and uses the funds to acquire a first home, the 10% early distribution penalty does not apply. The definition of first-time home buyer for purposes of this exception may not be what many expect. The definition of first-time home buyer is someone who has not owned a home for the past two years. The first-time home buyer may be the IRA owner but certain family members can qualify as well. A spouse, or a child, grandchild, parent or grandparent of the IRA owner or their spouse all qualify.
If an individual takes a distribution from their IRA for qualified higher education expenses, the 10% early distribution penalty does not apply. Such expenses include post-secondary tuition, fees, books, supplies and required equipment. The education expenses must occur in the same year as the IRA distribution.
Health Insurance for the Unemployed
If an individual takes a distribution from their IRA to pay for health insurance when unemployed, the 10% early distribution penalty does not apply. The insurance can be for the IRA owner, a spouse, or dependents.
A distribution taken from an inherited IRA after the death of an IRA owner is never subject to the 10% penalty. It does not matter what the age of the IRA owner was or what the age of the beneficiary is.
If an individual takes a distribution from their IRA, the 10% penalty will not apply if they are disabled. The standard for disability for this purpose is a strict one and it is difficult to meet. The IRA owner must be unable to engage in any gainful activity because of a physical or mental condition. The condition must be expected to last a long or indefinite period of time or be expected to result in death. In other words, the disability must be total and permanent.
IRA owners may set up a series of payments from an IRA and avoid the early distribution penalty. These payments are sometimes called 72(t) or substantially equal periodic payments. To qualify, the payments must be calculated in a very specific way and must be taken at least annually. If there is a modification of the payments before the individual reaches age 59 ½ or before five year have passed, she will be hit with the 10% penalty on all distributions already taken prior to age 59 ½ under the payment plan.
A reservist who is called to active duty after September 11, 2001 for more than 179 days or for an indefinite period of time may take penalty-free distributions from their IRA. The distribution must be made no earlier than the date the reservist was called to active duty and no later than the end of the active duty period. Also, the IRA owner can repay part or all of these distributions to an IRA within a two-year period after the active duty period is over.
Deductible Medical Expenses
IRA distributions are not subject to the 10% penalty if the distribution does not exceed the IRA owner’s deductible medical expenses for the year. The medical expenses can be for the IRA owner, a spouse or a dependent. An individual is not required to itemize deductions on their tax return in order to be eligible for this exception.
IRA funds paid due to a tax levy by the IRS are not subject to the early distribution penalty. This only applies when the IRA is actually levied by the IRS.
I am an Ed Slott Master Elite trained IRA Specialist and I would like to help you. If you have any questions regarding this article or would like to schedule a complimentary consultation please call my office at 845-627-8300. My Client Service Coordinator Christina will be happy to set up a convenient time so I can help.Warm Regards,
Beth Blecker CEO
Eastern Planning Inc.
Follow Beth Blecker on Twitter: @EasternPlanning
“Ed Slott’s Elite IRA Advisor Group” is solely an indication that the financial advisor has attended training provided by Ed Slott and Company. Ed Slott is not affiliated with Royal Alliance Associates, Inc. Securities and advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC. Additional advisory and financial planning offered through Affiliated Advisors, Inc. Insurance services offered through Eastern Planning Inc. Listed entities not affiliated with Royal Alliance. Reprinted from The Slott Report, 7/01/2020, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Copyright © 2019 Ed Slott and Company, LLC.