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Exceptions to the 10% Penalty of IRC Section 72(t)
The term qualified retirement plan means:
- A qualified employee 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:
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Distributions made to your beneficiary or estate on or after your death,
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Distributions made because you are totally and permanently disabled,
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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
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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:
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Distributions made to you after you separated from service with your employer,
if the separation occurred after you reached age 55.
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Distributions made under qualified domestic relations orders (QDROs).
The following exceptions apply only to IRAs:
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Distributions made to pay for certain qualified higher education expenses.
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Distributions made to pay for first-time homebuyers. These exceptions do not
apply to qualified employee retirement or annuity plans.
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