4 tips on avoiding the 10% early distribution penalty on IRA distributions:
IRA distributions that you take before you reach age 59-½ are subject to a 10% additional tax , which is in addition to any income tax owed on the amount. For example, if you take an early distribution of $100,000 from your traditional IRA, it would be subject to an early distribution penalty of $10,000. But, if certain requirements are met, you get an exception to this penalty. The challenge is to accurately determine if you meet the requirements to qualify for an exception.
Mr. Kim- whose employment was terminated at age 56- qualified for this exception on any amount distributed from the plan directly to him. However, he rolled over the amount to his IRA- at which point the qualification for this exception was lost, as it does not apply to IRAs. As a result, a portion of the distribution that he subsequently took from his IRA was subject to the 10% early distribution penalty.
A full list of the exceptions is available in IRS Publications 575 and 590-B, which are available at www.irs.gov.Some exceptions apply to IRAs, some apply to employer plan accounts- such as 401s, and some apply to both types of accounts. It is therefore important to pay careful attention to the type of account from which you plan to take your distribution, and whether the distribution from the intended account qualifies for the exception that you think applies.
For instance, if you are claiming an exception due to being disabled, the distributions must be taken while you are disabled. Distributions taken before then do not qualify for the disability exception. Similarly, for amounts used to cover qualified higher education expenses, the distribution must occur the year in which the expenses are incurred.If you have more than one type of account, assess whether it makes sense to take the distribution from one account over the other.
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