www.qns.com I LIC COURIER I SEPTEMBER 2019 35
BY JOHN SAVIGNANO, CPA
IRS is eyeing early distributions from IRAs. e agency wants to
make sure that individuals are properly reporting payouts taken
before age 59 ½.
e issue is a common IRS audit red ag. A 2015 review found that
40% of people scrutinized made mistakes, with most coming from
taxpayers who didn’t qualify for one of the numerous exceptions to
the 10% additional excise tax on early distributions.
e 10% ne hits most pre-age-59 ½ payouts. It’s in addition to the
regular income tax that is due. Nut there are other important
exceptions. Some apply to both IRAs and 401(k)s. Others, to one or
the other. Here are some common exceptions:
Early withdrawals from IRAs to help “rst-time” home buyers are
penalty-free. IRA owners can take out up to $10,000 to help buy or
build their primary home or one for a spouse, child, grandkid, parent
or grandparent. e funds must be spent within 120 days. You can be
a rst-time homeowner even if you owned a home before, as long as
you and your spouse didn’t own a home in the previous two years.
Ditto for cost of higher education…college tuition, books
computers, supplies and room and board for students enrolled at least
half-time. Unlike for home buyers, there’s no dollar cap. To qualify for
the exception, payouts must cover education costs for the IRA owner,
spouse, child or grandkid that are paid in the year of the withdrawal.
Early distributions from 401(k)s for education or rst-time homes
don’t get relief.
Taking substantially equal payments from an IRA or 401(k) is a key
exception. Distributions must continue for the longer of ve years or
until the recipient hits 59 ½. Withdrawals must be based on the
owner’s life expectancy or the joint life expectancy of the owner and
named beneciary. If the payouts vary too much from year to year, all
previous distributions taken from the account will be hit with the 10%
IRAs and 401(k)s can be utilized to pay big medical expenses
without penalty. e funds must be used for medical costs of the
taxpayer, spouse or dependent. e payout must cover expenses paid
in the year of the withdrawal. And only medicals that exceed 10% of
adjusted gross income (7.5% for 2018) qualify for the exception.
e unemployed can use IRA funds to buy health insurance in some
cases. Payees must be unemployment for 12 weeks. Self-employed
individuals also qualify.
ree other exceptions to the penalties don’t allow much planning:
Death or permanent disability of the account owner or IRS levy on
IRS has a helpful chart listing all withdrawals that escape the 10%
penalty. It describes the exceptions, notes those that apply to 401(k)s
and those that apply to IRAs, and lists the section of the income tax
code where the exception appears. ere is no general hardship
exception to the 10% tax on early payouts.
John Savignano is a partner with Savignano Accountants & Advisors
located at 47-46 Vernon Blvd., Second Floor, in Long Island City. If you
have any questions or require additional information, please call John