Retirement Products

When the owner of an IRA (traditional, SEP, SIMPLE, Roth) dies, distributions (paid to the beneficiary), regardless of the individual's age at death, are not subject to the 10% penalty tax.

10% penalty does not apply to distributions to pay for certain higher education expenses. Importantly, the withdrawl is required to be made during the taxable year for the owner, spouse, or the child or grandchild of the owner.

Qualifying expenses include: tuition, fees, books, supplies, and equipment required for attendance at a post-secondary educational institution. Additional rules must be met for room and board to qualify.

10% penalty tax does not apply if the distribution is used to pay eligible first-time homebuyer expenses. Qualifying expenses include: cost of purchasing, building, or rebuilding a principal residence.

The following individuals can be the purchaser: account owner, spouse, child, grandchild, parent, or grandparent of the account owner or spouse.

An individual qualifies as a first-time homebuyer if he or she, or, if married, his or her spouse did not have any ownership interest in a principal residence during the two-year period immediately preceding the purchase. To qualify, a distribution is required to be used within 120 days after the withdrawal. There is a lifetime limit of $10,000 per individual and is taxable to the individual making the withdrawal.

Should the distribution be made from a Roth IRA and the account is at least five years old, no part of the distribution, including earnings, is taxable. Additionally, an individual can withdraw basis)from their Roth IRA at any time, for any reason, without being subject to either income tax or 10% penalty tax.

Substantially equal periodic payments (SEPP) are not subject to the 10% early distribution penalty tax. Payments must be made for later of five years or until age 59½. Otherwise, the 10% penalty reattaches retroactively to include all pre-59½ payments. 

Click here for our 72(t) payment calculator.

10% early distribution penalty tax is waived if the distribution is made pursuant to an IRS tax levy. However, this exception does not apply if the individual voluntarily makes a withdrawal to pay the taxes (in order to avoid the levy).

Qualified reservists called to duty after September 11, 2001, are not subject to the 10% early distribution penalty tax. A withdrawal is considered a qualified reservist distribution if:

• The distribution is from an IRA or from amounts attributable to elective deferrals under a 401(k) or 403(b) plan;
• Distributed to a member of the Reserves that is called to active duty for a period in excess of 179 days or for an indefinite period;
• Distributed during the period beginning on the date the Reservist is called to active duty and ending at the close of the active duty period; and
• The distribution was made no earlier than the date of the order or call to active duty or not later than the close of active duty.

Qualified reservists may re-contribute distributed amounts to IRAs, but not to a 401(k) or 403(b) plan. The contributions must be deposited within two years after the end of the period of active duty.

The 10% early distribution penalty tax does apply when converting an IRA to a Roth IRA. Additionally, the penalty does not apply when converting a qualified plan, governmental 457(b) or 403(b) assets to a Roth IRA. Although distributed (converted) amounts generally are subject to income tax.

Click here for our Roth IRA Conversion calculator.

Once per year (365 days; not calendar year), an individual can withdraw unlimited fundsfrom any of their IRAs use the proceeds for any reason so long as the distributed amount is deposited (rolled over) to the same or another IRA within 60 days. Otherwise the distributed amount will be subject to income tax and potential penalty.

Internal Revenue Service (IRS) guidance limits tax free 60-day rollovers between IRAs to one rollover in any one-year period, regardless of the number or type of IRA an individual owns. The one-year period is 365 days from receipt of the withdrawn funds, not calendar year. Please contact your financial professional for additional information.

This information is not intended to be tax or legal advice. For more information on these topics, contact your legal or tax advisor.

Please consult an IRA specialist at 888-522-2388 for additional information.

A “Qualified Birth or Adoption Distribution,” allows up to $5,000 across all eligible retirement plans to be distributed penalty-free (although subject to income tax) from an individual retirement account (IRA) or a 401(k) plan within one year from the date of birth, or the date on which the adoption of an individual under age 18 is finalized. The adoption of a child of any age who is physically or mentally incapable of self-support is also eligible in the new provision.