Legal Blog

The Weekly Scenario: Avoiding The 10% Penalty Tax

Question: I need to withdraw funds from my retirement plan account now. How can I avoid the 10% penalty tax? Answer: The government intends that your IRAs and qualified plans be used for your retirement, not on an as needed basis. Therefore, the law imposes a penalty for early withdrawals. If you withdraw money from your IRA or qualified plan before reaching 59 ½, you will generally be subject to a 10% excise tax. Moreover, all amounts withdrawn will normally be subject to ordinary income tax. There are, however, some exceptions where you will not be subject to the 10% excise tax if you take an early distribution from your retirement plan account. There are about 10 permitted exceptions ranging from death to divorce. One exception to note is the ‘substantially equal payments’ exception. If you begin to take distributions that are part of a series of substantially equal payments based upon your life expectancy, the 10% penalty tax does not apply. There are three methods to determine the payments, but in all cases, the payments must continue until the later of the individual reaching 59 ½ or 5 years. If during that time, the payments are changed or stopped, the 10% penalty will apply. Comment: The IRS also gives an exception for those who are facing a disability. As always, if you have any questions or would like to learn more, please let me know.

ABOUT STEVE SHANE

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 connect with Offit Kurman via our BlogFacebookTwitterGoogle+YouTube, and LinkedIn pages.  You can also sign up to receive Law Matters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.

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