Legal Blog

The Weekly Scenario: Withdrawing Funds from Retirement

Question: I need to withdraw funds from my retirement account now. How can I avoid the 10% penalty tax?

Answer: The intent of retirement plan accounts from the government perspective is that the money be used for retirement, not on an as needed basis. As such, tax law imposes a penalty for early withdrawals. Generally, if you withdraw funds from your retirement plan account (“plan account”) before you turn 59 ½, there is a 10% excise tax (in addition to the ordinary income tax paid on distributions). However, there are exceptions provided in the law and if you meet one of the exceptions, the 10% excise tax will not apply. Here are a few of the exceptions (there are more than those listed below). 1. Separation from Service – if you have left your employer and in the year of your separation you are age 55 or older, distributions from the plan account maintained with that employer will be exempt from the penalty. This exception does not apply to IRAs or other qualified plans of other employers. 2. Disability – if you become disabled, you are not subject to the penalty tax (disabled means ‘unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.’ 3. Substantially Equal Payments – If you begin to take distributions that are part of a series of substantially equal payments based upon your life expectancy, then the 10% penalty tax does not apply. Payments must continue until the later of you reaching 59 ½ or 5 years. 4. Divorce – Distributions from your plan account pursuant to a divorce will not be subject to the 10% penalty tax (must be pursuant to an agreement called a qualified domestic relations order or QDRO). 5. Health Insurance if you are unemployed – distributions from an IRA that do not exceed the cost of medical insurance premiums for you, your spouse and your dependents during a period of your unemployment may be exempt from the penalty tax. 6. If you die, distributions to your beneficiaries are not subject to the 10% penalty tax (the government loves to give tax benefits to the deceased!) If you have any questions or would like more information please contact Steve Shane at: | 301.575.0313.


Steve Shane Head Shot for webSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates. You can also connect with Offit Kurman via FacebookTwitterGoogle+YouTube, and LinkedIn. WASHINGTON | BALTIMORE | FREDERICK | PHILADELPHIA | WILMINGTON | VIRGINIA