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§72(t)/§72(q) SEPP Plans Loading

Exceptions to the 10% Penalty of IRC Section 72(t)

The term qualified retirement plan means:

  • A qualified employer retirement plan such as a 401(k),
  • A qualified annuity plan,
  • A tax-sheltered annuity plan for employees of public schools or tax-exempt organizations,
  • An IRA including a Simple IRA.

To discourage the use of deferred qualified retirement funds for purposes other than normal retirement, the law imposes an additional 10% tax on certain early distributions of these funds.

Early distributions are those you receive from a qualified retirement plan before reaching age 59.5.

Distributions that you roll over to another qualified retirement plan are not subject to this 10% tax. There are certain exceptions to this penalty. Four of these exceptions apply to distributions from either a qualified retirement plan or an IRA. They are:

  • Distributions made to your beneficiary or estate on or after your death,
  • Distributions made because you are totally and permanently disabled,
  • Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiaries. If these distributions are from a qualified employee plan, you must separate from service with this employer before the payments begin for this exception to apply, and
  • Distributions that are equal to or less than the amount of deductible medical expenses, that is, the amount of your medical expenses that are more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.

The following additional exceptions apply only to distributions from a qualified employee retirement or annuity plan:

  • Distributions made to you after you separated from service with your employer, if the separation occurred after you reached age 55. For the definition of age 55, IRC Notice 87-13 states... "such separation from service occurred during or after the calendar year in which the employee attained age 55."
  • Distributions made under qualified domestic relations orders (QDROs).

The following exceptions apply only to IRAs:

  • Distributions made to pay for certain qualified higher education expenses.
  • Distributions made to pay for first-time home buyers. These exceptions do not apply to qualified employee retirement or annuity plans.
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