Withdrawals from Qualified Plans for Those under Age 59 ½

Withdrawals from Qualified Plans for Those under Age 59 ½

Retirement plans often represent the largest asset an individual may own.   In these unsettling economic times, an individual may want to access this asset to pay bills or for other needs.   Typically, if an individual under age 59 ½ wants to withdraw monies from a qualified plan, the IRS will impose a 10 percent penalty.

There are a series of exceptions to the 10 percent penalty, but the exceptions can vary depending on whether the retirement plan is an IRA or 401(k) plan or other qualified plans.

The following rules for a penalty free withdrawal are the same whether the withdrawal is from an IRA or from a 401(k) plan, if the account owner: 

1. Becomes totally disabled;
2. Is required by court order to give money to a spouse as part of Divorce or legal separation (i.e. a QDRO);
3. Has medical expense that exceed 7.5% of adjusted gross income;
4. Is separated from service (through termination, permanent layoff, quitting or early retirement) in a year when the account owner turned 55 or later; or
5. Subject to certain conditions, takes withdrawals in substantially equal amounts over owner’s life expectancy.

There are other means of penalty free withdrawals from IRAs, (but not 401(k)s): 

1. To pay health insurance premiums during a period of unemployment lasting 12 consecutive weeks;
2. To pay for tuition, room and board and books (net of scholarship) for spouse, child or grandchild;
3. To pay up to $10,000 to purchase first home.

There are also hardship withdrawals from 401(k)s which would include costs  (subject to certain condition) related to purchase of principal residence not to exceed $10,000, payment of tuition, funeral expenses and the like.

Interestingly, an owner can take a loan from a 401(k) plan (but not from an IRA).  There are many conditions that must be met, but there are certain advantages; particularly, no credit checks, low interest rates, no financial hardship requisites, and interest paid on the account is paid to the account owner’s account, not to a bank or credit card company.  

Potential job loss poses the biggest disadvantage.  The loan must be immediately paid back (within 60 days) if account owner loses his or her job or changes employers.

For more information, refer to the IRS website, “Retirement Plans FAQs Regarding Hardship Distributions,” www.irs.gov/retirement/article/0,,id=162416,00.html  and “Retirement Plans FAQs Regarding IRA Distributions,” www.irs.gov/retirement/article/0,,id=111413,00.html.