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By: John GrobeIn a recent article we looked at the origin of the 10% early withdrawal penalty and how it applied to Individual Retirement Arrangements (IRAs) and employer sponsored defined contribution plans (such as the TSP). Well, there are exceptions to the 10% early withdrawal penalty that we will cover in this article.
Would it surprise you if I told you that the exceptions varied between the TSP and IRAs? I didn’t think so; tax rules get so confusing that I wouldn’t be surprised if the Internal Revenue Service had a Director of Confusion and Obfuscation in its staff. What follows is a list of the exceptions as they currently stand.
Exceptions that are applicable to both the TSP and IRAs:
• Death of the account holder.
• Disability. The rather stringent Social Security definition of disability is used to determine if the account holder qualifies for this exception.
• 72(t) payments. A series of substantially equal monthly payments that continues for the longer of five years or until the account holder turns 59 ½.
• Medical expenses that are over 7.5% of the account holders adjusted gross income.
• To satisfy an IRS levy.
• Birth of adoption of a child.
• Qualified Active Reservist.
Exceptions that are applicable only to IRAs
• Higher education expenses.
• First time home buyer.
• To purchase health insurance if unemployed.
Exceptions that are applicable only to the TSP
• Retirement in or after the year the account holder turns 55. This also applies to public safety employees who retire in or after the year they turn 50.
• Phased retirement.
• Payments under certain qualified court orders (e.g., divorce, child support, etc.).
Benjamin Franklin once said, “Nothing is certain but death and taxes.” Congress doesn’t have the ability to change death, but it sure can change taxes in confusing ways. No wonder that the Internal Revenue Code is sometimes referred to as the “attorneys and accountants full employment act.”
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