Qualified plans and early withdrawals -- here’s what you need to know

Watch Money Monday with Rod Meloni.

Because people are pulling money out of their retirement funds during COVID-19, here’s the consequences and how to avoid taxes and penalties.

Qualified retirement plans: 401(k) 403(b)

  • Uncle Sam doesn’t want you to take the money early: Before 59-1/2
  • There is a 10% penalty and you must pay ordinary income tax in the year you withdraw
  • There are exceptions:
    • if you become disabled
    • the account owner dies and the money is withdrawn by a beneficiary
    • withdrawals are set up at substantially equal payments—a pension or annuitized over your life expectancy
    • if the money is used to pay certain medical expenses not covered by insurance

Individual retirement accounts are not “qualified accounts” but early withdrawal is OK when used for:

  • Medical insurance premiums if the owner is unemployed
  • $10,000 used to buy a first home
  • qualified higher education expenses—tuition, fees, books and room and board for the account holder or immediate family

More information on this:

About the Author:

Rod Meloni is an Emmy Award-winning Business Editor on Local 4 News and a Certified Financial Planner™ Professional.