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

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  • the account owner dies and the money is withdrawn by a beneficiary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:

• https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
• https://www.investopedia.com/ask/answers/102714/ira-qualified-plan.asp
• https://www.investopedia.com/terms/p/premature-distribution.asp
• https://www.investopedia.com/articles/personal-finance/082515/how-do-you-calculate-penalties-401k-early-withdrawal.asp
• https://www.mortgagecalculator.org/calcs/early-retirement-withdrawal.php
• https://www.letsmakeaplan.org/blog/view/lets-make-a-plan-blogs/common-mistakes-to-avoid-when-paying-back-student-loans