Insights + Resources

IRAs and employer-sponsored retirement plans have different exceptions, although the rules are similar.

IRA exceptions

The following distributions are not subject to the 10% penalty tax:

• Death of the IRA owner. Distributions to your designated beneficiaries after your death. Most non-spouse beneficiaries must liquidate the inherited accounts within 10 years.
• Disability. Distributions made due to your qualifying disability.
• Unreimbursed medical expenses. Distributions equal to the amount of your unreimbursed medical expenses that exceed 7.5% of your adjusted gross income in a calendar year. (You don’t have to itemize deductions to use this exception, and the distributions don’t have to actually be used to pay those medical expenses.)
• Medical insurance. Distributions made to pay for health insurance if you’ve lost your job and are receiving unemployment benefits.
• Substantially equal periodic payments (SEPPs). Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You must withdraw funds at least annually based on one of three rather complicated IRS-approved distribution methods. You generally can’t change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do you’ll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
• Qualified higher-education expenses for you and/or your dependents.
• First home purchase, up to $10,000 (lifetime limit).
• Qualified reservist distributions. Certain distributions to qualified military reservists called to active duty.
• Birth or adoption of a child. Account owners can withdraw up to $5,000 for a qualified birth or adoption of a child. When permitted, distributions can be recontributed within three years.
• Disaster relief. Distributions up to $22,000 for expenses related to a federally declared disaster; distributions are considered gross income over three years (effective for disasters on or after January 26, 2021). When permitted, distributions can be recontributed within three years.
• Terminal illness. Distributions made when you have a terminal illness or condition that may reasonably result in death within 84 months of the date of certification by a physician. When permitted, distributions can be recontributed within three years.

Employer-sponsored plan exceptions

The following distributions are not subject to the 10% penalty tax:

• Death of the plan participant. Upon your death, your designated beneficiaries may begin taking distributions from your account. Most non-spouse beneficiaries must liquidate the inherited accounts within 10 years.
• Disability. Distributions made due to your qualifying disability.
• Part of a SEPP program (see above). Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You generally cannot modify the payments for a period of five years or until you reach age 59½, whichever is longer.
• Attainment of age 55. Distributions made to you upon separation of service from your employer. The separation must have occurred during or after the calendar year in which you reached the age of 55 (age 50 for qualified public safety employees).
• Qualified Domestic Relations Order (QDRO). Payments made to an alternate payee under a QDRO.
• Medical care (see above). Distributions equal to the amount of your unreimbursed medical expenses that exceed 7.5% of your adjusted gross income in a calendar year.
• To reduce excess contributions/deferrals. Distributions made to correct excess contributions you or your employer made to the plan over the allowable limits.
• Qualified reservist distributions. Certain distributions to qualified military reservists called to active duty.
• Birth or adoption of a child. Account owners can withdraw up to $5,000 for a qualified birth or adoption of a child. When permitted, distributions can be recontributed within three years.
• Disaster relief. Distributions up to $22,000 for expenses related to a federally declared disaster; distributions are considered gross income over three years (effective for disasters on or after January 26, 2021). When permitted, distributions can be recontributed within three years.
• Terminal illness. Distributions made when you have a terminal illness or condition that may reasonably result in death within 84 months of the date of certification by a physician. When permitted, distributions can be recontributed within three years.

If you plan to withdraw funds from a tax-deferred account, make sure to carefully examine the rules on exemptions for early withdrawals. For more information on situations that are exempt from the early-withdrawal income tax penalty, visit the IRS website at www.irs.gov.

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