Exceptions to 10% Early Distribution Penalty Chart
Rev. 04/16/10; E-mail Alert 2010-6, Updated 09/13/11 E-mail Alert 2011-13
COMPARISON OF QUALIFIED PLAN (QP) AND TRADITIONAL IRA
EXCEPTIONS TO THE 10% PENALTY ON DISTRIBUTIONS PRIOR TO AGE 59½
Last Updated September 2011
|
Reason for Distribution |
Penalty Exception? |
|
|
| Separation from service in or after the year that the individual has reached age 55 1 — IRC §72(t)(2)(A)(v) |
Yes |
No |
| Disability as defined in IRC Section 72(m)(7) 2 — IRC §72(t)(2)(A)(iii) |
Yes |
Yes |
| Payments made on or after the participant's death 3 — IRC §72(t)(2)(A)(ii) |
Yes |
Yes |
| First time home purchase — up to $10,000 4 — IRC §72(t)(2)(F) |
No |
Yes |
Roth Conversion; provided the conversion remains in the Roth IRA for 5 years; Notice 2008-30 Q&A-3 — QP: §408A(c)(3)(B),
IRA: §408A(d)(3)(A)(ii) |
Yes |
Yes |
| IRS Tax Levy — IRC §72(t)(2)(A)(vii) |
Yes |
Yes |
| "Qualified" post-secondary education expenses 5 — IRC §72(t)(2)(E) |
No |
Yes |
| Payment of unreimbursed medical expenses exceeding 7.5% of AGI 6 — IRC §72(t)(2)(B) |
Yes |
Yes |
| Hardship withdrawal, deemed loan, plan termination |
No |
N/A |
| QDRO [Code Section 414(p)] distribution paid to alternate payee — IRC §72(t)(2)(C) |
Yes |
N/A |
| Transfer of IRA Incident to Divorce 7 — Code Section 408(d)(6) |
N/A |
Yes |
| Corrective distributions: excess deferrals, excess annual additions, ineligible employees, etc. — IRC §401(k)(8)(D), 401(m)(7) and 402(g)(2)(C) |
Yes |
N/A |
Corrective Distribution: Excess IRA contribution paid prior to tax filing due date, including extensions. — IRC §408(d)(4)
Note: Earnings distributed are subject to 10% penalty. 8 |
N/A |
Yes |
| Qualified disaster distributions 9 — KETRA, GOZA, EESA |
Yes |
Yes |
| Permissive withdrawals from a Eligible Automatic Contribution Arrangement — IRC §414(w)(1)(B) |
Yes |
N/A |
| Qualified Reservist Distribution — Individual called into active duty for more than 179 days 10 — IRC §72(t)(2)(G) |
Yes |
Yes |
Payment of health insurance premiums, provided conditions are met. 11 — IRC §72(t)(2)(D) |
No |
Yes |
| Distribution of Dividends Passed Through Under an ESOP — IRC §72(t)(2)(A)(vi) |
Yes |
N/A |
| Distribution of employer securities with Net Unrealized Appreciation (NUA), if NUA is excluded from gross income; NUA exempt from 10% penalty |
Yes |
N/A |
| Substantially equal payments paid in accordance with Rev. Rul. 2002- 62. 12 — IRC §72(t)(2)(A)(iv) |
Yes |
Yes |
| Distribution after participant/IRA owner reaches age 59½ 13 — IRC §72(t)(2)(A)(i) |
Yes |
Yes |
1 Click here for more information on the age 55 exception
2 Check your plan document for availability of this and for other definitions of disability. Note that only the IRS Code Section 72(m)(7) disability definition is entitled to the waiver of the 10% penalty. See Publication 590, for 2010, page 53
3 Check your plan document for the availability of installments versus only lump sum payments. If only lump sum, then a direct rollover may be made by a non-spouse beneficiary to an inherited IRA.
4 For details, see Publication 590, for 2010, page 54
5 For details, see Publication 590, for 2010, page 53
6 For details on the qualified plan exception, click here. For details on the IRA exception, see Publication 590, for 2010, page 52
7 Transfer is made without 10% penalty to ex-spouse's IRA. Withdrawals after the transfer are not exempt from the 10% penalty. For details, see Publication 590, for 2010, page 28
8 For details, see Publication 590, for 2010, page 48
9 These are for a limited geographic area (as declared by President or defined in law) and for a limited time; for example, Hurricanes Katrina, Rita and Wilma and the Midwestern Storms and Flooding of 2008. For details see FS-2008-27; Pub 4492-B; Pub 4492
10 For details See Publication 590, for 2010, page 54
11 For details See Publication 590, for 2010, page 53
12 Substantially equal payments rule requires separation from service for qualified plans, but not for IRAs.
13 If there is a change in the substantially equal payments before the close of the 5-year period beginning with the date of the first substantially equal payment and after the employee attains age 59 1/2, the 10% penalty would apply, even though the individual is over age age 59 1/2. IRC §72(t)(4)(A)(ii)(I)
For more information on qualified plan exceptions, see Publication 575 on Pension Distributions, for 2010, page 31
Bill Grossman, ERPA, QPA
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