* 10 percent penalty for
premature distributions. (Code Sections 72(t) and 4974(c).)
Besides the recipient only getting 80% of the amount, if the amount of the withholding is not deposited into an IRA, income tax as well as the 10% addition to tax for
premature distributions could apply to the withholding.
Asked which, if any,
premature distributions of retirement savings they had taken, 40.8% of respondents said a loan, and 24% said they had cashed out their retirement plan after a job change.
Of course, pre-591/2 distributions must satisfy the "substantially equal periodic payment" (SEPP) rules of IRC Section 72(t) to avoid the additional 10 percent penalty tax for
premature distributions. And post-701/2 distributions must satisfy the "required minimum distribution" (RMD) rules according to the Uniform Lifetime Table to avoid the 50 percent penalty tax on "under distributions."
Of course, pre-59V2 distributions must satisfy the "substantially equal periodic payment" (SEPP) rules of IRC Section 72(t) to avoid the additional 10 percent penalty tax for
premature distributions. And post-70V2 distributions must satisfy the "required minimum distribution" (RMD) rules according to the Uniform Lifetime Table to avoid the 50 percent penalty tax on "under distributions."
Individuals and their tax advisors should acquaint themselves with the options available in order to plan for IRA distributions that avoid a common pitfall in retirement planning: the penalty for
premature distributions.
The American Taxpayer Relief Act of 2012 ("ATRA") allows 401(k) plan participants to convert funds held in their traditional 401(k) accounts into Roth 401(k) accounts without triggering the 10 percent penalty on
premature distributions. Prior to ATRA, this type of conversion was permitted only if the taxpayer was otherwise allowed to make penalty-free withdrawals from the 401(k)--i.e., if he or she had reached age 59 1/2, had died, become disabled, or otherwise separated from service.
While he would still have to pay income taxes on the distributions from his qualified plan, he can avoid the 10% penalty for
premature distributions by employing "a series of substantially equal periodic payments" under IRC [section] 72(t).
Withdrawals from an IRA for qualified higher education expenses of the taxpayer are not subject to the 10-percentpenalty tax for
premature distributions (but are subject to regular income taxes).
Regularly calculated tax for AMT purposes excludes certain taxes including: (1) the alternative minimum tax; (2) the tax on benefits paid from a qualified retirement plan in excess of the plan formula to a 5% owner; (3) the 10% penalty tax for certain
premature distributions from annuity contracts; (4) the 10% additional tax on certain early distributions from qualified retirement plans; (5) the 10% additional tax for certain taxable distributions from modified endowment contracts; (6) taxes relating to the recapture of the federal subsidy from use of qualified mortgage bonds and mortgage credit certificates; (7) the additional tax on certain distributions from education IRAs; and (8) the 15% additional tax on medical savings account distributions not used for qualified medical expenses.
* If the IRA owner is under the age of 59 1/2, then the IRC Section 72(t)(2)(A)(iv) exception could be used to avoid the 10% penalty tax on
premature distributions.
Certain
premature distributions are subject to penalties.
