Five Ways to Withdraw Your Retirement Savings Early – Part 5

Use Beneficiary Distributions to withdraw from your retirement savings before age 59 1/2 without a 10% penalty.

There are numerous exceptions to the 10% penalty on early distributions from retirement accounts.  In this series, we will help educate consumers on many of the lesser known exceptions.

Continuing in our series on exceptions, we identify beneficiary distributions as another exception.

Surviving beneficiaries can usually avoid the early withdrawal penalty on withdrawals. However, they will need to be aware of fairly complicated Required Minimum Distribution (RMD) Rules.

Inherited Qualified Plan Assets/IRA Assets

Designated beneficiaries that withdraw inherited assets are not subject to the 10% early withdrawal penalty.  However, those that inherit larger balances may not wish to elect a direct cash payment as the entire amount would be subject to tax in the year of the distribution.  In turn, an Inherited IRA could be established.  This is ideal for spreading out payments over a longer life expectancy, minimizing the taxation.

Distribution rules vary depending upon the age of the original account holder at death and whether or not you are the surviving spouse.

Tax Reporting

The custodian/trustee of the inherited account should report the withdrawn amounts as death distributions by including ‘Code 4’ in box 7 of the IRS Form 1099-R.

Learn More

Visit www.iraselect.com/ira_beneficiaries to learn more about inheriting retirement savings.