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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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After 27 straight years of employment I am now without a job

Customer Question

After 27 straight years of employment I am now without a job going on 6 months. I need to cash in my 401k and IRA in order to pay bills.
I'm 50 years old and I was in the 30% tax bracket. My wife has Lupus and it's getting more difficult to work as a nurse as she's required to be on her feet most of the time.
My question is: Is there any relief from the IRS penalty that I can site when withdrawing my 401k?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Hi and welcome to our site!Sorry for your situation...There are several exclusions from the penalty.Please be aware that distribution still will be included into taxable income.Please be aware that exclusions might be different for IRA distributions and 401k distributions.The following six exceptions apply to distributions from any qualified retirement plan: 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 your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply. Distributions to the extent you have deductible medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or over) whether or not you itemize your deductions for the year. The 7.5% limitation is a temporary exemption from January 1, 2013 to December 31, 2016 for individuals age 65 and older and their spouses. Distributions made due to an IRS levy of the plan under section 6331. Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA: Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50. Distributions made to an alternate payee under a qualified domestic relations order, and Distributions of dividends from employee stock ownership plans.
Customer: replied 1 year ago.
Is the IRS penalty less for an IRA withdraw versus a 401k withdraw?
Expert:  Lev replied 1 year ago.
To discourage the use of retirement funds for purposes other than retirement, the law imposes a 10% additional tax on early distributions.
That is so-called "early distribution penalty."
That 10% additional tax applies to both 401k and IRA distributions unless an exception applies.
For your situation - it is possible to start distributions as a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (your spouse) - that will allow to avoid that early distribution penalty.
You may view that distribution as starting your retirement before 59 1/2.
Payments are substantially equal periodic payments if they are made in accordance with one of the following methods.
-- Required minimum distribution method. Under this method, the resulting annual payment is redetermined for each year.
-- Fixed amortization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.
-- Fixed annuitization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.
For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at
www.irs.gov/pub/irs-irbs/irb02-42.pdf
.