Welcome to Tax Insights Podcast, where we break down complex tax topics into bite-sized how-tos. In this episode, Jeff Dvorachek explains key considerations for early retirement account withdrawals. He covers potential penalties and new 2024 exceptions that could help you avoid them, especially in cases like emergencies or domestic abuse. Let’s dive in!
On today’s episode of Tax Insights, Jeff discusses key considerations for early retirement account withdrawals. He explains potential penalties and the new 2024 exceptions that could help you avoid them. Tune in to learn how these changes might impact your retirement planning and the steps you can take to stay compliant.
Host: Today, we’re going to dive into retirement planning, specifically discussing the pros, cons, do’s, and don’ts of taking money out early from a retirement account.
Jeff: Absolutely. We’ve talked a lot about putting money into retirement plans, and that’s crucial because once you retire, your income stream stops, and that retirement money needs to last the rest of your life. But there are situations where you might need to take some of that money out early. If you withdraw funds before age 59 and a half, you’ll generally have to pay income tax plus a 10% federal penalty, along with any state penalties.
Host: So, listeners should be aware of those penalty fees if they’re considering early withdrawal.chat
Jeff: Definitely. However, the IRS does provide some exceptions to that 10% penalty. If you take money out for specific reasons, you still have to pay the income tax, but you won’t incur the 10% penalty.
Host: What are some of those exceptions?
Jeff: There have been long-standing exceptions, like for the birth of a child, disability, or education expenses. But there are two new exceptions starting in 2024. One is for domestic abuse victims, and the other is for unexpected emergencies.
Host: So, in those cases, the 10% penalty doesn’t apply?
Jeff: Correct. For instance, domestic abuse victims can withdraw up to $10,000 or 50% of their account balance without paying the 10% penalty. This can be crucial when someone needs cash to move forward from a difficult situation.
Host: Is this something people self-qualify for?
Jeff: Yes, it’s more of a self-qualification. As long as you file your tax return and request the exception, the 10% penalty won’t apply.
Host: On the flip side, there’s also an age where people must start withdrawing money, right?
Jeff: Yes, there is. It used to be 70 and a half, but now it’s 73, depending on your age. There’s a mandatory withdrawal age, but I want to mention one more exception—the emergency personal expenses. This is brand new. You can take out $1,000 for any reason. The IRS has left this very open-ended, but it can only be done once every three years.
Host: So, it’s $1,000 for any reason, and you don’t have to worry about the 10% penalty?
Jeff: That’s right. You do have to pay income tax, but no 10% penalty. You also don’t have to repay it, although you can if you choose to within three years. If you repay it, you can take out that $1,000 again in the future.
Host: Jeff, great information as always. If listeners want to connect with you at Hawkins Ash, what’s the best way to reach out?
Jeff: I recommend visiting HawkinsAsh.CPAs, specifically the CPA-HQ section. There, you’ll find practical resources, expert insights, and can connect with us on social media for more financial tips.
