IRS Notice 87-13 – Early Withdrawal from IRS & Pension Plans – IRS Tax Help, Former IRS Agents
Most distributions from an IRA, 401(k) or other retirement plan generally must be included as part of your taxable income. That is simply the tax law.
Withdrawals from a retirement account(s) may be subject to an additional tax of 10% if the distribution is made before you reach age 59.1/2 years old.
10% Penalty from Early Distributions from all Retirement Plans
If you withdraw money from a qualified retirement plan, you may be subject to an additional tax of 10%, however there are exceptions.
Facts about a Roth IRA
Fact is this penalty may apply to Roth IRAs even if it has been at least five years since you first opened up your Roth account.
For Roth IRA account holders.
It will be crucially important to review the exceptions to the 10% penalty, as otherwise the Roth IRA distribution could become subject to both tax and the 10% penalty.
The additional tax on an early distribution is 10% of the taxable amount.
The taxable amount is also included in your taxable income.
You can possibly avoid this additional tax penalty if you meet certain criteria, but you cannot avoid including your retirement withdrawal from your taxable income.
You will want to consider the tax impact before you dip your retirement accounts for short term financial emergencies. You should contact your professional tax advisor to find out more.
Simple IRA
If you withdraw money from a SIMPLE IRA and you first began participating in a SIMPLE IRA
Hardship withdrawals
Not all distributions from qualified plans are subject to a 10% excise tax when they are paid to a participant prior to attaining age 59½.
Hardship distribution from a retirement plan
A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions.
A 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.
If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship.
For an example a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.
If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an “unforeseeable emergency.”
Definition of hardship for a 401(k) plan?
For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.
The need of the employee includes the need of the employee’s spouse or dependent.
Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee’s non-spouse, non-dependent beneficiary.
Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including:
1. certain medical expenses;
2. costs relating to the purchase of a principal residence;
3. tuition and related educational fees and expenses;
4. payments necessary to prevent eviction from, or foreclosure on, a principal residence;
5. burial or funeral expenses; and
6. certain expenses for the repair of damage to the employee’s principal residence.
A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee’s spouse and minor children.
Whether other resources are available is determined based on facts and circumstances.
For example, a vacation home owned by the employee and the employee’s spouse generally is considered a resource of the employee, while property held for the employee’s child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee.
A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if:
a. the employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer; and
b. the employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
A hardship distribution may not exceed the amount of the employee’s need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.
