10% penalty on all withdrawals, retroactively. Thus, once you get started, it pays for you to stay the course.
DISABILITY AND MEDICAL EXPENSES
The broad exceptions to Rule 72(t)-disability and medical expenses-are worth knowing about, just in case one of these serious situations should
Disability. If you can’t work, the 10% penalty won’t be assessed. “In practice, if you’re receiving a disability check, you probably can avoid the 10% penalty,” says Lee Rosenberg, a financial planner in Valley Stream, New York. “That’s true if you’re receiving Social Security disability benefits or if you’re receiving benefits from a disability insurance policy. One of my clients, a construction worker, hurt his back. His accountant attached [a document] to his tax return, explaining that he was receiving disability benefits from his union, and the 10% penalty was not enforced.”
Medical expenses. “The 10% penalty will be waived in the case of money withdrawn up to the amount of deductible medical expenses,” says Cory Grant, an attorney and estate advisor with Westhem Group Wealth Transfer Planning in San Diego, California.
Suppose you have adjusted gross income (AGI) of $60,000 in 1999 and medical expenses of $12,000? Deductible medical expenses start at 7.5% of AGI, or $4,500 in your case. Thus, you would be $7,500 over the threshold, so you could withdraw $7,500 from your retirement plan, penalty-free.
EMPLOYER-SPONSORED PLAN EXCEPTIONS
There are two other sit-uations under which you can pull out funds, but these apply to employer-sponsored plans only: separation of service and qualified domestic relations orders.
In the former
case, if you retire or change jobs, you can withdraw money, penalty-free, if the separation occurs during or after the year you reach age 55.
Then there are qualified domestic relations orders, or QDROs. “In a divorce or marital separa-tion, a QDRO is an order to the qualified plan’s administrator to transfer part of one spouse’s interest in the plan to the other spouse,” says Andrew Fair of the law firm Fair, Aufsesser & FitzGerald, White Plains, New York. “The 10% tax on withdrawals before age 591/2 does not apply to payments made to a spouse or ex-spouse under a QDRO.”
There are some IRA-only loopholes as well, which can help people meet healthcare, education and real estate expenses.
Health insurance. If you are out of work for at least 12 consecutive weeks, you can take enough money from an IRA to keep your health insurance in force for 60 days, penalty-free, and keep doing so until you’re back to work.
Education. Distributions from IRAs to pay post high school expenses are exempt from the 10% penalty. “Eligible expenses include tuition, room and board, fees, books, supplies and required equipment,” says Ed Slott, a certified public accountant in Rockville Centre, New York, who publishes Ed Slott’s IRA Advisor, a monthly newsletter. “Qualifying expenses can be yours, your spouse’s, your children’s, even your grandchildren’s.”
First home purchase. You also may take penalty-free withdrawals up to a lifetime amount of $10,000 for a first-time home purchase. To qualify, you cannot have had an ownership interest in a residence