Question

If I received a lump sum distribution from my former employer, how can I avoid the 10% penalty on retirement plan taxes?

Answer

If you take a taxable distribution before age 59 1/2, the distribution is subject to a 10% early withdrawal penalty. However, if you roll over your lump-sum distribution into another retirement plan within 60 days, you won’t be penalized.

You can also avoid the early withdrawal penalty if you meet one of the exceptions on Form 5329. Some common early withdrawal exceptions include:

  • Qualified retirement plan distributions due to separation from service in or after the year you reach age 55 (age 50 for qualified public safety employees such as policemen and firemen.)
  • Distributions made as part of a series of substantially equal periodic payments, at least annually, and for your life or for the joint lives of you and your designated beneficiary
  • Distributions due to total and permanent disability
  • Distributions due to death unless the distribution is from a modified endowment contract
  • Qualified retirement plan distributions for deductible unreimbursed medical expenses you paid this year. This applies up to the amount your expenses are more than 10% (or 7.5% if you or your spouse is 65 or older) of your adjusted gross income (AGI).

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