A:

Most distributions from qualified retirement plans made to you before you reach the age of 59.5 are subject to an additional tax of 10%. The IRS may waive this tax under certain circumstances; however, there is no broad definition of "hardship" for the purposes of exemption from the 10% penalty.

You may be exempt from the 10% tax if the hardship you're facing is included in the IRS's list of exceptions - for example, if you are withdrawing for certain deductible medical expenses or if the distributions are going to an alternate payee under a qualified domestic relations order. The list of exceptions can be found in IRS publication 575 (page 28) at http://www.irs.gov/pub/irs-pdf/p575.pdf. If you are unable to view a PDF document, the HTML version is at http://www.irs.gov/publications/p575/ar02.html#d0e3742.

To claim the early-distribution penalty exception, you may be required to file additional forms with the IRS along with your income tax return. Be sure to consult with your tax professional to ensure the appropriate forms are filed.

(For more on this topic, read the article Taking Penalty-Free Withdrawals from Your IRA.)

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. What are the best ways to use your 401(k) without a penalty?

    Learn how to avoid incurring additional tax penalties when using your 401(k) before retirement with hardship distributions ... Read Answer >>
Related Articles
  1. Taxes

    How 401(k) Withdrawals Work When You're Unemployed

    Unemployed individuals can pursue several options when taking money out of their 401(k), but they should carefully weigh taxes and possible penalties
  2. Retirement

    When a 401(k) Hardship Withdrawal Makes Sense

    If you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
  3. Retirement

    Your 401(k): Not the Best Emergency Fund

    If you have an emergency and need to access your retirement funds, you may have to pay a penalty if you dip into your 401(k). But there is a better option.
  4. Retirement

    When Paying Off Debt With Your 401(K) Makes Sense

    The experts warn against touching your retirement savings early, but there are situations where it is the best financial decision.
  5. Retirement

    5 Penalty-Free IRA Withdrawals

    Most Americans think that an IRA is locked up until they reach 59.5, and withdrawals before that date trigger taxes and a 10% penalty tax. This is not always true.
  6. Retirement

    Tax-Saving Advice for IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  7. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  8. Retirement

    How Yearly Taxes on 401(k) Accounts Work

    Learn how your contributions to traditional or Roth 401(k) accounts are taxed, either in the year of contributions or at withdrawal, depending on the type.
  9. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  10. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
RELATED TERMS
  1. Hardship Withdrawal

    An emergency withdrawal from a retirement plan that may be subject ...
  2. Hardship Exemption

    An approved excuse from paying a penalty fee for not having health ...
  3. SEC Form ADV-H

    An application for either a temporary or continuing hardship ...
  4. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  5. Exempt Income

    Certain types or amounts of income not subject to federal income ...
  6. Catastrophic Health Insurance

    Affordable Care Act-compliant medical coverage open to people ...
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
Trading Center