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Kelly Bullis: Early distribution from retirement if NOT in 2020

By Kelly J. Bullis, CPA

Come on? Haven’t we already heard enough from you about retirement plans Kelly? Well, a lot of folks want to know more than just the special rules for 2020 only. When you are under 59 ½ and take an early distribution from your qualified retirement account, normally there is a 10% penalty along with paying regular income tax on that distribution. (Except in 2020, read two week’s prior article for more on that.)

There are exceptions. Let’s take a little detour. Can you imagine a GPS navigator talking like an IRS instruction publication? “Turn right on Main Street, unless you are driving a red car, in which case, you could turn left, but then you would need to turn left again immediately, at which point you can choose if you want to go one or two blocks before turning left again…”

So, let’s imagine that when taking an early distribution from a qualified retirement plan before you turn 59 ½, you happen to have the right color car to avoid the 10% early distribution penalty.

“Red” exception: Disability. A disable person is “somebody who is 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.” You will need a statement from a physician.

“Blue” exception: Medical Expenses. Medical expenses not reimbursed by health insurance that exceed 10% of your adjusted gross income are not subject to the 10% penalty.

“Green” exception: Health Insurance Premiums. If you are unemployed for at least 12 consecutive weeks AND the withdrawal from your retirement plan is taken in that same year or the next AND the withdrawal is made prior to 60 days of employment in a new job, then your early distribution is not subject to the 10% penalty.

“Yellow” exception: First Time Home Purchase. You may withdraw up to $10,000 from your IRA during your lifetime to pay qualified acquisition costs for a principal residence. You are considered a “First Time Home Buyer” if you have not owned a home in the two years preceding the purchase. (If married, your spouse must also meet this requirement.) But wait, there’s more! If you are helping your child, grandchild, parent, or grandparent purchase their 1st house you can avoid the 10% penalty.

So there you go, want to take money out of your retirement before you turn 59 ½, turn right into a 10% penalty, unless you have the red, blue, green, or yellow car, then turn left at one of the above exception streets and you’re free!

Did you hear? Prov 23:19 says, “Hear, my son, and be wise, and direct your heart in the way.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.