Finance Decoded

Avoiding 10% Tax Penalty

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Do you want access to money from your retirement accounts but aren't sure of the real costs involved?

Most retirement accounts have a set age requirement you must reach before making penalty-free income distributions, which is usually 59.5 but can sometimes be as early as age 50. If you decide to access your accounts earlier, you could face penalties ranging from 10%-25%, which is not even considering the income taxes you will also owe.

Follow these five easy steps to avoid the 10% Penalty:

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1.Check the age of the IRA owner; look for an exception to the penalty.

The main exceptions are disability, death, medical expenses, fire-time homebuyers, higher education expenses, an IRS levy and health insurance for the unemployed.

2.Make sure the exception you want to use applies to the type of plan you have.

Some exceptions apply to both IRAs and employer plans (such as 401k plans), some apply to IRAs only and some apply to employer plans only.

3.The expense must be in the same year as the IRA distribution.

Make sure the IRA distribution is made in the same year the expense is incurred.

4.Some exceptions apply when the distribution is used for a family member.

Exceptions such as death and disability apply solely to the account owner, while other exceptions apply to family members, including spouses, children or grandchildren.

5.How to claim an exception.

You should file IRS Form 5329 with your tax return to tell the IRS what exception you are claiming.

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Finance Decoded answers the common questions that people ask about financial planning, wealth management, and tax mitigation. 

Walter Pardo is the CEO of Wealth Financial Partners & WFP Tax Partners, located in the historic Liberty Corner section of Basking Ridge, NJ. He is a Certified Wealth Strategist and Professional Plan Consultant with Series 7, 66 and 63 licenses. Walter is licensed in the states of AZ, CA, CT, FL, KS, OH, NY, NJ, IL, PA, SC, and TX, and VA. Walter is a Master Elite member of the Ed Slott Elite IRA Advisor Group℠. He is active in his community in central New Jersey, and currently serves on the Board of Trustees of Loyola Jesuit Center in Morristown. 

When not working with clients or volunteering in his community, Walter may be found trying to reduce his handicap at Hawk Pointe Golf Club in Washington, NJ, or playing the piano at home for his wife, Suzanne, and two daughters, Isabel and Natalie. 

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Wealth Financial Partners, LLC and IFG are unaffiliated entities. OSJ: 12671 High Bluff Dr. Suite 200, San Diego, CA 92130. 

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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