February 2023 | Question of the Month

By Patricia Hancock

February 16, 2023

“Hello.  I am retiring at the age of 57.  I will need to use the money I saved in my retirement savings account for income.  Since I am under the age of 59½, what are some ways I can use my money without incurring a penalty? Thank you.”  Ella

Hi, Ella.  Thanks for sending in your question!  For IRA owners and retirement plan participants, who are under the age of 59½, taking a distribution from a retirement account is typically off limits.  The distribution will most likely be taxable, and there is a good chance that a 10% penalty will also apply.  However, there are some exceptions to this rule.  There is a possibility that the 10% penalty can be avoided, however, you must be careful.  Some exceptions apply only to IRAs, some apply only to plans, and some apply to both.

Here are the exceptions that are applicable to both IRAs and plans, including SEP and SIMPLE IRAs.  The exceptions are for death, disability, setting up 72(t) which is “substantially equal periodic payments”, medical expenses (over 7.5% of AGI), IRS levy, active reservists, and birth or adoption.  The exceptions that are applicable to IRAs only are higher education expenses, first-time home buyer, and health insurance if you are unemployed.  And finally, the exceptions that are applicable to plans only are age 55, age 50 for public safety employees, Section 457(b) government plans, divorce through a QDRO (qualified domestic relations order), and phased retirement distributions from federal plans.

Additionally, some of the exceptions apply only to the account owner.  For example, the disability exception can only be used if the IRA or retirement plan participant is the one who is disabled.  If an under 59½-year-old spouse were to take an IRA distribution from his own account, under the impression he could claim the disability exception based on his wife’s disability, he would be mistaken, and a 10% penalty would be applied.

On the flip side, some exceptions are available to the account owner as well as certain family members.  The higher education exception is a good example.  As long as the higher education expenses are for the IRA owner, the IRA owner’s spouse, or any child or grandchild of the IRA owner or the IRA owner’s spouse, then the 10% penalty exception will work.

There is a definitive nuance to each of the 10% penalty exceptions.  The timing of the distribution vs. when bills are paid can be critical.  Some exceptions allow for repayment, others do not.  Regardless of which exception is applicable to your situation, be sure to know the rules before taking any plan or IRA distributions.  So, that was a good question, but when you are trying to get money out of a plan before the age of 59½, you must make sure you understand all the exceptions and what other options are available to you to access your money without penalty.

To get your retirement planning questions answered or to sign up for a retirement course, visit the Prepare Institute website (www.theprepareinstitute.org) to contact us and/or find a retirement course or class near you.