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Early Withdrawals from Qualified Retirement Plans

Are you not quite at retirement age, but in need of early access to your qualified retirement plan account? If you are not close to retirement, are you thinking about taking a withdrawal or loan from your qualified retirement plan account to help out with the care of your aging parents or relatives? Whatever the reason may be, whether you will be able to withdraw or borrow funds from you qualified retirement account before the age of 59 ½ depends on the rules contained in your specific qualified retirement plan. Many qualified plans allow you to borrow up to one half of the fund balance as a loan, which you will typically have to pay back within 5 years at a modest interest rate to cover your loss of investment growth. An early withdraw will generally trigger tax penalties under the Internal Revenue Code (“IRC”) and leave you with a hefty tax bill, including a 10 percent penalty on the early withdrawal. You can avoid the 10 percent penalty in a variety of situations, including the following common circumstances.

 

Rollovers. Under section 72(t)(1) of the IRC, rollovers from a qualified plan or individual retirement account into another individual retirement account within 60 days from the date of the withdraw will not trigger the 10 percent penalty tax.

 

Beneficiary Distributions. If the owner of a qualified retirement plan or individual retirement account passes away, section 72(t)(2)(A)(ii) of the IRC provides that the penalty shall not apply if the distribution is to a beneficiary.

 

Certain Separations from Service. Distributions from a qualified plan that are made to an employee that separates from service after the age of 55 may escape the penalty under section 72(t)(2)(A)(v) of the IRC.

 

Disability and Medical Expenses. If the distribution is in connection with the account owner or participant’s permanent disability no penalty will be assessed. See IRC 72(t)(2)(A)(iv). Also, you may be entitled to relief if the distribution is taken to pay for medical expenses that exceed 7 ½ percent of your adjusted gross income. See IRC 72(t)(2)(B).

 

Substantially Equal Periodic Payments. If the early distribution is part of a series of substantially equal periodic payments from the qualified plan that are spread out over your life expectancy, no penalty will apply. See IRC 72(t)(2)(A)(iv).

 

Hardship. If you are experiencing an unforeseeable emergency related to a family member (your spouse, parents, or one of your dependents), for example funeral expenses, then you may be able to avoid any penalties for an early distribution. See section 826 of the Pension Protection Act.

 

As you can see the law provides some flexibility depending on your life circumstances and reason for the early withdraw; however, before making such a decision you should consult to tax and/or legal advisor to see if there are other means to address your needs.

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