Benefits Plans - Retirement Savings Plans: IRS 10% Penalty
The Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty if you take a distribution from a qualified retirement plan (such as the U-M Retirement Plan) prior to age 59½, unless an exception is met. If an exception is not met, you must pay the penalty each time you withdraw funds before you are age 59½. The penalty does not apply to distributions of your contributions and earnings from the U-M 457(b) deferred compensation plan.
The 10% penalty is not withheld at the time of the distribution; you pay it when you file your federal income tax return. TIAA-CREF or Fidelity will issue Form 1099-R to you for the distribution at the end of the year. You must include the 1099-R with your federal tax return.
Exceptions to the Penalty
Exceptions to the IRS penalty are listed below. Note that there are additional exceptions to the penalty, some of which only apply to IRA distributions, and are not listed below. Consult with a qualified tax adviser if you have questions.
- You terminate employment from the University during or after the calendar year in which you reach age 55. For example, if you terminate from U-M at age 55 and take a withdrawal, the penalty does not apply. In contrast, if you terminate from U-M at age 40 but wait until age 55 to take a withdrawal, the penalty will still apply. This is because you were not 55 in the calendar year in which you terminated your employment from U-M and the penalty will continue to apply until you reach age 59½.
|Important: This exception to the penalty does not apply to an IRA. If you rollover your U-M Retirement Plan accumulations to an IRA and then take a distribution from the IRA prior to age 59½, this exception to the penalty is no longer available to you.|
- You terminate your employment at the University and take the distribution as a series of payments (at least one every year) based on your life expectancy (or the life expectancy of you and your annuity partner). The payments must be substantially equal in amount and must continue without change (unless you become disabled or die) for five years or until you reach age 59½, whichever comes later.
- You are an active-duty military reservist. Military reservists called to active duty can receive payments from their individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without having to pay the early-distribution tax, according to the Internal Revenue Service (Sept. 28, 2006). The newly-enacted Pension Protection Act of 2006 eliminates the 10-percent early-distribution tax that normally applies to most retirement distributions received before age 59½. The new law provides this relief to reservists called to active duty for at least 180 days or for an indefinite period. For more information, see the IRS website at http://www.irs.gov/newsroom/article/0,,id=163054,00.html
- You become totally and permanently disabled. See Internal Revenue Code section 72(m) for the definition of disabled.
- Qualified retirement plan distributions used to pay for tax-deductible medical expenses that exceed 7.5% of your adjusted gross income. This exception does not apply to distributions made from an IRA for this purpose.
- Qualified retirement plan distributions made to an alternate payee under a Qualified Domestic Relations Order (QDRO). This exception does not apply to distributions made from an IRA for this purpose.
- In the event of your death.
IRS Form 5329
If you qualify for one of the exceptions to the early withdrawal penalty, you may need to file IRS Form 5329 with your federal return in order to claim the exception to the penalty. Part I, Line 2 of the form allows you to list a code indicating which exception to the penalty you are claiming. You can download IRS Form 5329 along with the instructions for completing the form and the codes to claim an exception to the penalty by visiting the IRS website at: www.irs.gov
|This information is based on the University’s current understanding of highly complex Internal Revenue Code (IRC) and U.S. Treasury Department regulations. It is provided for general informational purposes only. The University of Michigan does not provide tax advice. It is the responsibility of the plan participant to comply with federal tax regulations. Questions or concerns should be addressed to a qualified tax adviser.|
The University of Michigan in its sole discretion may modify, amend, or terminate the benefits provided with respect to any individual receiving benefits, including active employees, retirees, and their dependents. Although the university has elected to provide these benefits this year, no individual has a vested right to any of the benefits provided. Nothing in these materials gives any individual the right to continued benefits beyond the time the university modifies, amends, or terminates the benefit. Anyone seeking or accepting any of the benefits provided will be deemed to have accepted the terms of the benefits programs and the university's right to modify, amend or terminate them.