{"id":20644,"date":"2017-06-14T12:00:00","date_gmt":"2017-06-14T12:00:00","guid":{"rendered":"https:\/\/www.hrblock.com\/tax-center\/"},"modified":"2023-08-29T08:45:17","modified_gmt":"2023-08-29T13:45:17","slug":"ira-rules-and-penalties","status":"publish","type":"post","link":"https:\/\/www.hrblock.com\/tax-center\/irs\/tax-responsibilities\/ira-rules-and-penalties\/","title":{"rendered":"Avoiding 401(k) and IRA Early Distribution Penalties"},"content":{"rendered":"<p>You save up for retirement in an IRA or 401(k) plan, only to realize that you need the money sooner than planned. Or maybe you change jobs and need to move your retirement money over to a new account. If these situations occur, what early distribution penalty exceptions can you take advantage of? Don\u2019t worry \u2014 we\u2019re here to help explain what you can do.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h2>Exceptions to Early Distribution Penalties<\/h2>\n<p>You usually put money into a tax-deferred savings plan to save for your future retirement. If you withdraw money from your plan before age 59 1\/2, you might have a 10% early withdrawal penalty. However, there are exceptions to this early distribution penalty.<\/p>\n<p>The penalty doesn\u2019t usually apply to distributions from your employer plan or IRA if any of these are true:<\/p>\n<ul>\n<li>You\u2019re totally and permanently disabled.<\/li>\n<li>Your beneficiary receives the distribution from your retirement plan after your death.<\/li>\n<li>You receive distributions as a series of mostly equal periodic payments based upon either:\n<ul>\n<li>Your life expectancy<\/li>\n<li>The joint life expectancies of you and your beneficiary<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>IRAs have additional exceptions to the 10% early distribution penalty. You won\u2019t have a penalty for a distribution from your IRA if you use it:<\/p>\n<ul>\n<li>To pay for health insurance premiums. Both of these must be true:\n<ul>\n<li>You\u2019re unemployed.<\/li>\n<li>You\u2019ve received unemployment compensation for at least 12 consecutive weeks.<\/li>\n<\/ul>\n<\/li>\n<li>To pay for higher education expenses.<\/li>\n<li>To buy, build, or rebuild a home for certain people. These people must not have had an ownership interest in a main home for at least two years. If this is true, you can use your IRA distribution for any of these people:\n<ul>\n<li>Yourself<\/li>\n<li>Spouse<\/li>\n<li>Child<\/li>\n<li>Grandchild<\/li>\n<li>Parent, grandparent, great-grandparent, etc.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>Additional exceptions to the 10% early distribution penalty apply to 401(k) plans. See <a href=\"https:\/\/www.irs.gov\/forms-pubs\/about-publication-575\">IRS Publication 575<\/a> for more information.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>Even if you don\u2019t pay a penalty, the taxable part of the distribution will be taxed as ordinary income.<\/p>\n<h2>Rollover Your Employer-Sponsored Retirement Plan Account<\/h2>\n<p>When you change jobs, you might consider rolling over your company retirement account assets into an IRA or to a new employer\u2019s plan. You can complete a retirement rollover in two ways: a direct rollover or an indirect rollover. You could incur an early withdrawal penalty of 10% for an indirect rollover. Read on to understand why.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p><b>With a direct rollover<\/b>, the plan administrator will send the retirement rollover distribution directly to either the your IRA account or your new employer\u2019s plan. In this case, you\u2019re keeping the money invested, so an early withdrawal penalty doesn\u2019t apply.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p><b>With an indirect rollover, <\/b>the funds are sent to you and not the final account. There\u2019s one big difference here. The money you\u2019ll receive will be the distribution amount minus a government withholding.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>When depositing your retirement rollover funds in the new IRA or plan, you\u2019ll need to make up the amount that was withheld to fully fund the rollover. If you don\u2019t fully fund the retirement rollover within 60 days, you\u2019ll pay a penalty because it will count as an early distribution.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h3>Special Cases<\/h3>\n<p>Rolling over your retirement plan distribution into an IRA stops you from using certain rules. Ex: You won\u2019t be able to use the special ten-year averaging rules if you:<\/p>\n<ul>\n<li>Were born before Jan. 2, 1936<\/li>\n<li>Are a beneficiary of a plan participant born before Jan. 2, 1936<\/li>\n<\/ul>\n<p>If you don\u2019t want tax withheld from a retirement plan distribution that isn\u2019t a retirement rollover, you must complete Form W-4P. If you don\u2019t withhold tax, you might have to make estimated payments for your tax liability. Tax isn\u2019t usually withheld if you expect the distribution won\u2019t be in your gross income.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>You save up for retirement in an IRA or 401(k) plan, only to realize that you need the money sooner than planned. Or maybe you change jobs and need to move your retirement money over to a new account. If these situations occur, what early distribution penalty exceptions can you take advantage of? Don\u2019t worry [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[25,53],"tags":[],"class_list":["post-20644","post","type-post","status-publish","format-standard","hentry","category-irs","category-tax-responsibilities"],"acf":[],"yoast_head":"<title>401K and IRA Early Distribution Penalties | H&amp;R Block<\/title>\n<meta name=\"description\" content=\"Taking money out of your retirement plan? 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