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• W2992891207 startingPage "48" @default.
• W2992891207 abstract "EXECUTIVE SUMMARY * WHEN CLIENTS ARE DESPERATE FOR FUNDS because of unforeseen circumstances, CPAs can help them tap retirement funds without triggering the 10% early withdrawal penalty. Eight exemptions to this penalty relate to life cycle events and present tax-planning opportunities. * DISTRIBUTIONS TO A DISABLED TAXPAYER WHO HAS little or no disability insurance may escape the 10% penalty. A taxpayer with deductible medical expenses also may qualify for an exemption. * A TAXPAYER WHO RETIRES BEFORE AGE 59 1/2 is exempt from the 10% penalty if the distribution is part of a series of substantially equal periodic payments. An employee who quits his or her job, however, must be at least age 55 to avoid the penalty. * IRA DISTRIBUTIONS WILL NOT BE PENALIZED if the funds are used to pay health insurance premiums for an unemployed taxpayer and his or her family, qualified higher education expenses for his or her family, or a first-time home purchase. * A DISTRIBUTION MADE UNDER a bona fide loan agreement may escape the penalty. * CPAs WITH CLIENTS WHO QUALIFY for more than one exemption must determine the mix of exemptions that will meet their financial needs. ********** CPAs commonly advise clients not to touch their savings in IRAs and employer-sponsored retirement plans before age 59 1/2 because of tax disincentives; in addition to ordinary income taxes, IRC section 72(t) imposes a 10% penalty on early withdrawals. But if clients desperately need funds to handle unforeseen life cycle events, CPAs must abandon their normal position and seek ways to minimize the related tax disincentives. IRC section 72(t) provides for 16 exemptions from the early withdrawal penalty (see exhibit 1, page 49), eight of which relate to life cycle crises. This article discusses the applicability and restrictions associated with these eight exemptions and provides CPAs with guidance on how clients can qualify for them. GENERAL APPLICABILITY OF THE PENALTY The 10% penalty is an income tax rather than an excise tax. It applies to any early distribution includable in the recipient's gross income from a qualified retirement plan, defined in IRC section 4974(c) to include * Section 401(a) qualified pension, profit-sharing or stock bonus plans. * Section 403(a) annuity plans. * Section 403(b) tax-sheltered annuity contracts. * Section 408(a) individual retirement accounts (IRAs). * Section 408(b) individual retirement annuities. An early distribution is one made before the participant reaches age 59 1/2. The penalty does not apply to the portion of an early distribution that is a return of basis, nor to any of the distributions identified in exhibit 1. DISTRIBUTION FOLLOWING A DISABILITY The 10% penalty doesn't apply to a distribution made to a disabled participant. IRC section 72(m)(7) and related regulations define a participant as disabled if he or she cannot engage in any gainful because of a medically determined physical or mental impairment expected to result in death or to be of long-continued or indefinite duration, and can furnish proof of this condition in the form or manner required by the IRS. gainful refers to the activity in which the participant normally engaged or a comparable one before the disability. Treasury regulations section 1.72-17(A) (f) (2) provides examples of impairments that ordinarily prevent people from engaging in a substantial gainful activity (see exhibit 2, page 52). However, having one or more of these impairments doesn't always permit a finding that an individual is disabled. The IRS evaluates the impairment based on whether it in fact prevents the person from engaging in substantial gainful activity. Exhibit 2: Impairments Preventing Substantial Gainful Activity * Loss of use of two limbs. …" @default.
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• W2992891207 date "2005-08-01" @default.
• W2992891207 modified "2023-09-28" @default.
• W2992891207 title "Withdraw without Penalty: Do Your Clients Rate an Exemption from the Penalty for Early Withdrawal of Retirement Funds?" @default.
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