Withdrawing early from your IRA

An early IRA withdrawal, typically before age 59 & 1/2, is subject to a 10% penalty tax on the taxable portion. There are several exceptions to this penalty. Reach out to your tax advisor with questions.

  1. Medical expenses: medical expenses exceeding 7.5% of AGI are exempt
  2. Higher Ed expenses: qualified educational expenses can be considered penalty-free withdrawals
  3. First-time home purchase: withdrawals up to a $10K lifetime limit are available for home acquisition costs.
  4. Substantially equal periodic payments: penalty-free withdrawals require adhering to specific conditions.
  5. Disability: withdrawals due to disability are penalty-free under specific conditions
  6. Long-term care: beginning in 2025, withdrawals for qualified long-term care are exempt
  7. Birth or adoption: withdrawals are possibly penalty-free up to $5K for birth or adoption expenses
  8. Emergency expenses: a new provision permits up to $1K annually for emergency expenses
  9. Disaster recovery: withdrawals are exempt up to $22K for qualified disaster recovery
  10. Military: active-duty reservists can withdraw penalty-free
  11. Terminal illness: withdrawals are penalty-free for the terminally ill
  12. After-death withdrawals: withdrawals are penalty-free after the death of the account owner
  13. Health insurance premiums during unemployment: withdrawals can be penalty-free for health insurance payments made during unemployment.
  14. IRS levies: if a withdrawal is to pay an IRS levy against the IRA account, it is exempt from penalties
  15. Victim of domestic abuse: withdrawals up to $10K are penalty-free for domestic abuse victims

Indiana 529 Credit

Indiana offers a credit of 20% of your contributions to a 529 account with a maximum credit of $1,500. If you have a child in college or private K-12, then contribute $7.5K to their Indiana College Choice 529 account, and then turn around and put that money back into your personal checking account. You don’t need to leave the 529 funds in the 529 to get the $1.5K Indiana tax
credit (i.e., save $1.5K of Indiana tax each year you do this). Contributions are now based on
an April 15th deadline. Meaning you can contribute towards the prior year up until April 15th of the following year as long as you apply the contribution to the prior year. To ensure you get the credit, you must have an Indiana 529 account. Indiana does cross reference the account contributions with your return and will deny the credit if the account isn’t an Indiana account.

IRS Extends Certain Relief from Required Distribution Penalties for Inherited IRA and Retirement Accounts to Cover 2024, But Indicates the Penalties are Expected to Apply for 2025

Inherited IRAs are subject to Required Minimum Distributions (RMDs) according to the SECURE Act. Per the SECURE Act, RMDs would be required for each of the first nine years following the decedent’s death with the remaining balance to be withdrawn in the tenth year. However, the IRS will not begin penalizing missed RMDs until 2025 at the earliest. The IRS announced that penalties will not be imposed on taxpayers who fail to take the RMDs on IRAs and Roth IRAs inherited from decedents who passed away after 2019 through year end 2024. While RMDs may not be required for 2024, we recommend that you strategize with your CPA on the best way to distribute funds from these accounts before the end of the tenth year so you don’t end up with a large tax impact in year ten.

Expanded Exceptions to 10% on Early Retirement Plan Withdrawals

Remember these withdrawals would still be subject to ordinary income tax – we are solely avoiding the 10% penalty on early withdrawals (before 59 ½) with these exceptions.  Beginning in 2023, individuals with a terminal illness will be able to withdraw funds from their retirement plans or IRAs without penalty and there is no limit to this exception.  In 2024, victims of domestic abuse would be able to withdraw up to $10,000 from their retirement plan or IRAs penalty free.  Starting in 2026, individuals subject to long term care would be able to withdraw up to $2,500 penalty free from their retirement plan but not IRAs. 

Do you have unused funds in your child’s 529 account?

Beginning in 2024, unused 529 accounts can be rolled over to a ROTH IRA in the beneficiary’s name.  The account must be open for at least 15 years and have no new contributions in the last five years.  These rollovers will be limited to the annual ROTH IRA contribution limits, currently $6,500.  There is also a lifetime limit of $35,000.  These rollovers will be tax and penalty free.

Required Minimum Distributions (RMD) on Inherited IRAs

If you inherited an IRA from someone who passed after 12/31/2020, there has been a lot of confusion on how to officially handle these accounts.  All agree that the account must be completely emptied by the end of the 10th year following the year of the original account owner’s death.  However, are you supposed to be taking RMDs from this inherited IRA?  Initially, the answer was no.  Then, the IRS said yes but they would not require them before 2023.  Now, we are still waiting on final regulations from the IRS but the IRS has delayed RMDs to 2024 at the earliest.  What does this mean?  If you have an inherited IRA from someone who passed after 12/31/2020, you are not required to take a RMD until 2024 at the earliest.  You can take distributions but you are not required to do so. 

Matching Student Loan Contributions

Do you have student loan debt that is keeping you from contributing to your employer’s retirement plan? Beginning in 2024, employers may match contributions when employee’s make student loan payments. If the employer has a student loan matching plan, the employer can make the company match contribution to the employee’s plan. You as the employee can then continue paying down your debt and have your employer fund your retirement plan. Further clarification on this matter is expected to be released before this goes into effect in 2024. 

Roth 401(k) RMD?

Roth IRAs do not have RMDs because taxes are paid when you make your contribution. However, a Roth 401(k) does have RMD requirements. To avoid the RMD, you roll your Roth 401(k) into your Roth IRA. You only need to do this if you reach(ed) RMD starting age in 2023 or earlier. In 2024, Roth 401(k)s will no longer be subject to RMDs.

Do you have money stuck in a 529 plan?

Beginning in 2024, beneficiaries of 529 education-savings accounts may transfer funds into their Roth IRA without taxes or penalties. In order to be eligible, the 529 must have been open for a minimum of 15 years and the owner of the Roth IRA must be the beneficiary of the 529 plan. The rollover limit is $35,000 lifetime and limited to the annual Roth contribution limits which are currently $6,500 or $7,500 per year. If you have a large balance, this will take a few years to execute.

Qualified Charitable Distributions

Are you over 70.5 and make charitable donations each year?  You may be able to use a qualified charitable distribution (QCD) which allows you to donate up to $100,000 per year directly from your IRA. The amount donated will count against your required minimum distribution requirements and reduces your taxable income on IRA distributions. If you typically take the Standard Deduction, the QCD allows you to get a deduction for your donations. Starting in 2024, qualified charitable distributions limit will be adjusted for inflation.

Required Minimum Distributions Now Required at Age 73

SECURE 2.0 Act of 2022 increased the minimum age for individuals to begin taking their Required Minimum Distributions (RMD) from their qualified pre-tax accounts (401(k)s, IRAs, 403(b)s, 457(b)s) from 72 to 73.  For an individual who turns 72 after December 31, 2022 and 73 before January 1, 2033, their first RMD must be taken by April 1 of the calendar year following the year they turn 73.  This means for individuals born in 1951, the first RMD does not need to be taken until April 1, 2025.  If you were born in 1951 and mistakenly took an RMD in 2023 already (not required to), you have until September 30, 2023 to “rollover” the distribution amount back into the account and avoid any tax liability.  A typical rollover is required to be completed within 60 days but the IRS has given relief for those who mistakenly took an RMD in 2023 until September 30, 2023 regardless of when the RMD was taken.

New Exceptions for 10% Early Distribution Penalty

If you withdraw money from a retirement account before age 59.5, you will likely be subject to an additional 10% penalty on total withdrawals. There are many exceptions to this penalty and Secure 2.0 Act adds a few more to the list.  In 2023, new exceptions include terminal illness, income attributable to excess contributions or a qualified disaster. Beginning in 2024, new exceptions will include expenses from financial emergency and victims of domestic abuse.

New Roth Options

You can now make after-tax contributions to a Simple IRA or SEP. Previously, contributions to these accounts could only be pre-tax. Employees may now also choose for their employers matching contribution to also be made on a post-tax basis. However, the employee must pay the income tax on post-tax contribution in the year it is earned.

New Statute of Limitations

A statute of limitations has been implemented regarding time frames for the IRS to issue penalties. The statute of limitations is three years for missed RMDs and six years for the excess IRA contributions excise tax. There was no limit previously.