Exceptions To Early IRA Distributions (10% penalty Waved)

Question 1

What is the penalty for early withdrawals from an IRA?

Answer 1

10% additional tax on the amount withdrawn.

Question 2

True or False: All early IRA distributions are subject to the 10% penalty.

Answer 2

False.

Question 3

What are penalty exceptions to early IRA distributions?

Answer 3

Specific circumstances under which the 10% penalty does not apply.

Question 4

What is one of the exceptions to the early withdrawal penalty (10%) for IRAs?

Early distribution is indicated by CODE 1 in box 7 of 1099-R

Answer 4

Common Exceptions: See form 5329
-Distributions for qualified higher education expenses- Room and Board qualifies
-Rule of 55= Separation from job after age 55
-Doesn’t matter if they were let go or they resigned.
-Total and permanent disability
-higher education purposes
-first home purchase
-Medical expense over 7.5% of AGI
EXAMPLE: Take the distribution and first take off 7.5% of AGI= exempt amount
-Distributions due to terminal illness
-unemployed individuals for health insurance (follows the 7.5% rule
- qualified birth or adoption distributions <$5,000
-Eligible emergency expense < $1000
-Victim of domestic abuse up to 10,000 or half of the account balance (whatever is less)

Question 5

Fill in the blank: Distributions made due to _____ are exempt from the early withdrawal penalty.

Answer 5

disability.

Question 6

What age must you be to avoid the early withdrawal penalty on IRA distributions?

Answer 6

59½ years old.

Question 7

True or False: First-time home purchases qualify for the early withdrawal penalty exception.

Answer 7

True.

Question 8

What is the maximum amount that can be withdrawn penalty-free for a first-time home purchase?

Answer 8

$10,000.

Question 9

Which family members’ medical expenses can qualify for an early withdrawal penalty exception?

Answer 9

Your own, your spouse’s, or your dependents’ medical expenses.

Question 10

What is one reason that allows for penalty-free withdrawals for IRAs?

Answer 10

To pay for health insurance premiums while unemployed.

Question 11

True or False: You can use IRA funds for any educational expense without a penalty.

Answer 11

False. Higher education only.

Question 12

How much $ of an early distribution qualifies when used to pay off a qualified birth or adoption expense?

Answer 12

Up to $5,000 penalty-free.

Question 13

Fill in the blank: Withdrawals made to satisfy a _____ court order are exempt from penalties.

Answer 13

divorce.

Question 14

What higher education expenses qualify for an early withdrawal exception?

Answer 14

Tuition, fees, books, supplies, and equipment required for enrollment.

Question 15

What is the IRS form used to report early distributions from IRAs?

Answer 15

Form 5329

Question 16

What happens if you do not qualify for an exception and withdraw funds early?

Answer 16

You will owe income tax plus the 10% additional tax.

Question 17

What is the exception for distributions made due to a qualified disaster?

Answer 17

Penalty-free withdrawals if the distribution is made within a specified timeframe.

Question 18

Fill in the blank: The penalty exception for medical expenses applies if the unreimbursed expenses exceed _____ of your adjusted gross income.

Answer 18

7.5%.

Question 19

What is the rule regarding penalties for inherited IRA distributions?

Answer 19

Beneficiaries can withdraw funds without penalty, regardless of age.

Question 20

True or False: You can take a loan from your IRA without penalties.

Answer 20

False.

Question 21

What must be true for the medical expenses exception to apply?

Answer 21

The expenses must be unreimbursed and exceed 7.5% of AGI

Question 22

What is the impact of taking an early distribution on your retirement savings?

Answer 22

It reduces the amount available for retirement due to taxes and penalties.

Question 23

What is a QCD or Qualified Charitable Distribution and how does it work?

Answer 23

A charitable donation that goes directly to the non profit from the IRA Trustee and up to $ 105,000. Tax free.
Owner of account must be 70.5 years old

Question 24

How long does a person have to complete an IRA Rollover and what happens if they miss the window?

Answer 24

60 days

If they miss the 60 day window, The penalty for taking an early distribution applies, however, taxpayers under certain circumstances can qualify for a waiver to the 60 day time limit to avoid possible taxes and penalties. There is a list of circumstances such as. - the financial institution committed an error; - the distribution was in the form of a check and the check was misplaced and never cashed;- the distribution was deposited into the wrong account that the taxpayer mistakenly thought was a retirement plan or IRA;- Taxpayer’s principal resident was severely damaged—
-Taxpayer’s family member died.
- Taxpayer or family member was seriously ill;-
Taxpayer was incarcerated ;-
-postal error occurred
There are a few other less frequent reasons. The taxpayer is the one that decides that they qualify and will report the rollover as valid. IRS may review. See steps for the self certification process under Rev. Procedure 2020-46 in the NTCC4012

Question 25

List a few of the most common Distribution Codes

What age must taxpayer be for a distribution to be considered Normal?

Answer 25

CODE 1 - Early distribution, no known exception
CODE 2 - Early distribution, exception applies.
CODE 3- Disability. Check the box under “Rollover or Disability” that says, “check here to report on form 1040, line 1 h”
This will allow the distribution to count as earned income which triggers various credit opportunities.
If they are a retired Public Service Officer other exclusions may apply
CODE 4- Death
CODE 5- Medical expenses that exceed over
7.5% of AGI - This amount can be itemized
CODE 6- Qualified retirement plan distributions made to an alternate payee under a qualified domestic relations order.
Does not apply to IRA’s.
CODE 7- NORMAL DISTRIBUTION - Age 59.5
Public Service Safety Officer- Age 50
and PSO can take up to $3000 off of taxable amount for medical for self or dependent.
CODE 8- Educational Expense
CODE 9- First Time Home Owner’s 100,000 limit applied within 120 days of sale.
CODE 11- qualified distributions to reservists while serving on active duty for at least 180 days.
CODE B- ROTH IRA if taxable amount has been determined. Otherwise it’s out of scope.
CODE D- Distributions from an annuity AND the taxable amount is known or can be figured out.

Question 26

An early distribution would be a distribution taken before age _____

Answer 26

59 1/2

Question 27

A victim of domestic abuse can make an early distribution from an IRA.
How much can they withdraw?

Answer 27

10,000 or
50% of account value (whatever is the lesser amount)

Question 28

How much can be taken early from an IRA due to an emergency?

Answer 28

$1000 or the vested amount, whatever is less. $1000 must be left in the account.