Avoiding Early Withdrawal Penalties

Tax Report

The IRS generally imposes a 10% penalty on withdrawals made from a qualified retirement plan or a traclitional individual retirement account ORA) before age 59%. (This penalty is in addition to any income taxes due.) However, there are several exceptions that may apply.*

Qualified Plans and IRAs


Penalty-free early withdrawals from lRAs and qualified plans may be allowed for:

  • Your disability or death
  • Payment of unreimbursed medical expenses that exceed a certain percentage of adjusted gross income
  • Substantially equal periodic payments over your lifetime or the lifetimes of you and a beneficiary

IRAs Only

  • If you own an IRA, yuu may be allowcd to take penalty-free early withdrawals to pay other expenses, such as:
  • FIrst-time hQme buying expenses of up to $10,000 (lifetime)
  • Higher education expenses for you, your spouse, or a child or grandchild of you or your spouse
  • Health insurance premiums if you collected unemployment compensation or could have if you had not been selfemployed

Qualified Plans Only

Early withdrawals from qualified plans an~ penalt.y free when made for one of the following reasons:

  • Separation from service with an employer if the separation occurs during or after the calendar year in which you attain age 55
  • Distribution to a former spouse under a qualified domestic relations order .

* The list presented is not all-inclusive.

Will You Owe the AMT?

The alternative minimum tax (AMT) can increase the complexity of your tax planning. Knowing the basic rules can help you better plan for its potential impact.

How It Works

Originally introduced in the 1980s, the AMT system was designed to prevent higher income taxpayers from avoiding federal income taxes through the use of various exclusions, deductions, and credits. To achieve this goal, the AMT system treats celtain items referreu tu as "preferences" and "adjustments" less favorably than they are treated for regular income-tax purposes.

Affected items include interest on certain tax-exempt bonds; itemized deductions for home equity loan interest, state and local income taxes, and medical expenses; personal and dependency exemptions; incentive stock options; and depreciation.

Generally, the AMT calculation starts with your regular taxable income and requires you to make the required revisions for adjustments and preferences until you arrive at alternative minimum taxable income (AMTI). Then, after an exemption amount is subtracted, a 26% tax rate is applied to the first $185,400 (in 2015) of the resulting income, and a 28% tax rate is applied to any amounts above $185,400.

The 2015 exemption amowlts are $83,400 (married filing jointly), $53,600 (single and head of household) and $41,700 (married filing separately). These exemptions phase out at higher income levels.


If you believe you may have a potential AMT problem either this year or in 2016 you may be able to use certain strategies to reduce your tax. For example, if a tax projection indicates that you will be subject to AMT this year but not ncxt ycar, you may want to delay prepaying certain expenses, such as st.at.e and local income taxes, for which you would not receive a tax benefit this year .•

Short Takes

IRS Limits Lump-sum Offers

The IRS announced that it is amending its required minimum distribution rules to prevent defined benefit plan sponsors from offering lump-sLim payments as a replacement for annuities currently in payout status. In recent years, plan sponsors have been offering lump-sum payouts in connection with "de-risking" programs, which allowed plan sponsors to transfer the risks of providing pension income from the plan to accepting participants. The new rules became effective on July 9,2015.


2015 Tax-filing Season Review

The National Taxpayer Advocate (NTA) recently released its report on the IRS's performance for the 2015 federal income-tax-filing season. The NTA concluded that, considering the IRS's current budget constraints, it "did a good job overall." However, the NTA said it had serious concerns about the level of service being provided to the public, noting that customer service representatives answered only 37% of calls (compared to 71% in 2014). For those who did get through, the average hold time was 23 minutes.

The general information in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.