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Previously, we discussed Section 72t and the ability to remove funds from an IRA before age 59 ½ using substantial equal periodic payments. There are other ways to avoid the 10% penalty, and here is a list.
| IRC section
72(t) penalty exemption |
Major restrictions |
|---|---|
| Distribution due to the disability of a participant. | – Participant must be disabled within the meaning of IRC section 72(m)(7). |
| Distribution as part of a series of substantially equal periodic payments. | – Payments must not occur less frequently than annually.
– Payments from plans other than IRAs or individual retirement annuities must not begin before employee separates from service. |
| Distribution due to separation from
service. |
– Does not apply if the separation from service occurs before the year the participant turns 55.
– Does not apply to IRA distributions or to self-employed individuals. |
| Distribution less than or equal to deductible medical expenses. | – Does not apply to pre-1997 IRA distributions. |
| Distribution to unemployed participant for health insurance premiums. | – Applies only to IRA distributions.
– Participant must have received federal or state unemployment compensation for 12 consecutive weeks or have qualified under the self-employment provision. – Limited to amount of health insurance premiums paid. |
| Distribution for qualified higher
education expenses of the participant or spouse, or their children or grandchildren. |
– Applies only to IRA distributions.
– Does not apply if participant qualifies for another exemption. |
| Distribution for the first-time purchase of a principal residence by the participant or spouse, or their child or grandchild. | – Applies only to IRA distributions. – Distribution must be used within 120 days to pay qualified acquisition costs.
– Lifetime limit of $10,000. – Does not apply if participant qualifies for another exemption. |
| Distribution subject to loan agreement. | – Loan agreement must be legally enforceable.
– Term of loan cannot exceed five years unless distribution is used to acquire a principal residence. – Participant must adhere to specified repayment schedule and the amount of the loan is limited. |
| Distribution made to a beneficiary or the estate of a participant on or after the participant’s death. | – Only applies to spousal beneficiary if spouse elects to leave plan assets in participant’s name rather than rolling them over into IRA established in spouse’s own name. |
| Dividend distribution to ESOP participant. | – Distribution must meet conditions for dividend deductibility established in IRC section 402(e)(1)(A). |
| Distribution pursuant to federal tax levy on plan under section 6631. | – Does not apply to pre-2000 distributions or distributions used to pay federal income taxes in the absence of a levy under IRC section 6631. |
| Distribution to alternate payee
under a qualified domestic relations order. |
– Does not apply to IRA distributions.
– Applies to reduced annuity payment regardless of age retiree makes election and retires. |
| Distribution to federal retire electing lump sum credit and reduced annuity. | – Does not apply to lump-sum distribution if retiree makes the election and retires before the year he or she reaches age 55. |
| Distribution rolled over into another qualified retirement plan within 60 days of the distribution. | – IRS can waive the 60-day rollover period if it believes the participant missed the deadline because of a “hardship” beyond his or her
control. |
| Distribution to correct excess contributions. | – Applies to 402(g), 401(k) and 401(m) plans and IRAs. |
| Distribution upon conversion from
traditional to Roth IRA. |
– Applies to entire distribution (including portion of distribution includable in income). |
