Frequently Asked Questions - Retirement Plan Services

What is an early withdrawal from an IRA or Retirement Plan? An early withdrawal from an IRA or Retirement plan is any withdrawal from the plan prior to age 59½.  See the exceptions to the penalties.

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What is the penalty for premature distributions from an IRA or Retirement plan? The penalty is generally 10% of the amount distributed. The entire distribution is also subject to income tax. A distribution from a SIMPLE plan within 2 years of opening the account is subject to a 25% penalty. See the exceptions to the penalties (IRA) / exceptions to the penalties (Retirement Plans).

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What are the exceptions to the premature distribution penalties?

IRA:
a. Distribution made to a beneficiary or individual’s estate, on or after the death of the individual.
b. Disability of the individual.
c. For medical care, but only to the extent allowable as a medical expense deduction for amounts paid during the taxable year for medical care (determined without regard to whether the individual itemizes). Thus, only amounts in excess of 7.5% of the individual’s adjusted gross income escape the 10% penalty.
d. For payment of health insurance premiums of an unemployed individual. The 7.5% floor does not apply if the individual has been unemployed for at least 12 weeks.
e. To pay for qualified higher education expenses during the taxable year for the taxpayer, the taxpayer’s spouse, or the child or grandchild of the taxpayer or taxpayer’s spouse. This exception is not granted to a Roth IRA.
f. For qualified first-time homebuyers up to a lifetime maximum of $10,000.
g. For distributions which are a part of a series of substantially equal periodic payments made at least annually for the life or life expectancy of the individual or the joint lives or life expectancies of the individual and his/her designated beneficiary.
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What are the exceptions to the premature distribution penalties?

Retirement Plan:
a. Distribution made to a beneficiary or individual’s estate, on or after the death of the individual.
b. Disability of the individual.
c. For distributions which are part of a series of substantially equal periodic payments made at least annually for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and his/her designated beneficiary and beginning after the employee separates from service of the employer.
d. Distributions made to the employee after separation from service after attainment of age 55, or made to certain employees who were separated from service as of March 1, 1986.
e. Distributions made to an alternate payee under a qualified domestic relations order.
f. Distributions made to an employee for medical care, but not in excess of the amount allowable as a deduction to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the individual itemizes). Thus, only amounts in excess of 7.5% of the individual’s adjusted gross income escape the 10% penalty.
g. Distributions made to reduce an excess contribution under a 401(k) plan.
h. Distributions made to reduce an excess employee or matching employer contribution.
i. Distributions made to reduce an excess elective deferral.
j. Distributions which are dividends paid with respect to stock of a corporation which are described in section 404(k) of the code.
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How soon does an IRA distribution need to be rolled into another IRA to avoid the premature penalty and/or income tax?
The rollover must be completed within 60 days of the distribution.

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What is the limit on the elective deferral amount for 401(k) plans?  
For 2014, the limit for those under 50 years of age is $17,500.  For those 50 and older, the limit is $23,000.

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What is "earned income" for the purpose of making an IRA contribution? Earned income is wages from an employer reported on Form W-2 or it is net self-employed income from a Schedule C (Business) or Schedule F (Farm) or self-employment income from any partnership, LLC or LLP. Basically, it is any income from which you have FICA and Medicare withheld or for which you pay self-employment tax.

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What is the contribution limit for an IRA? For the taxpayer in 2014, it is the lessor of $5,500 or earned income.  For the taxpayer’s spouse in 2014, it is the lessor of $5,500 or the taxpayer and taxpayer’s spouse’s earned income not already used for an IRA contribution.  For those age 50 or older by the end of the year, the limit is increased by $1,000.


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Are there any restrictions on who can make a deductible IRA contribution? Yes, there are several situations which may limit or eliminate a taxpayer’s ability to make a deductible IRA contribution. These include participation in a qualified retirement plan and some adjusted gross income levels or combinations thereof.

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