IRA penalty exceptions

The IRS early distribution penalty does not apply if the distribution falls under certain exceptions.

• Beneficiary distributions
• Disability distributions
• Substantially equal periodic payments
• Birth or adoption expenses*^† (Distributions must be made within 1 year after the birth or adoption date and are limited to $5,000 across an investor’s accounts per birth or adoption.)
• Certain medical expenses*
• Health insurance premiums during unemployment*
• First-time home purchase expenses (up to $10,000 per individual)*
• Qualified higher education expenses*
• Qualified reservist distributions*
• Distributions made while terminally ill*^†
• Distributions made in connection with federally declared disasters (up to $22,000 per individual)*^†
• Distributions for unforeseeable or immediate financial needs related to necessary personal or family emergency expenses (up to the lesser of $1,000 or the excess of your account balance over $1,000)*^†
• Distributions due to domestic abuse (up to the lesser of $10,000 as adjusted for inflation or 50% of the account balance)*^†

* Capital Group does not require documentation on these distributions. If made before age 59½, they are reported to the IRS as early distributions, with no known exception (IRS Code 1) on Form 1099-R. Consult a tax advisor to determine whether a distribution falls under a particular exception.

^† If your client wants to repay all or part of the distribution back to their IRA, they must do so within 3 years of the date they received the distribution.

The IRS considers a taxpayer to be exempt from the early distribution penalty if the individual’s condition meets the following definition of disabled in Internal Revenue Code (IRC) section 72(m)(7): “an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” Capital Group does not determine whether a disability qualifies for the exception.

• The date the disability occurred
• That the account owner’s condition meets the IRC 72(m)(7) definition of disabled

Account owners may also provide the necessary documentation to the IRS when filing their taxes.

• For 5 tax years or until the age of 59½, whichever is longer
• At least annually
• In substantially equal payments calculated using one of these methods:
  
  • Amortizing the IRA balance over a period equal to the life expectancy of the IRA owner or over the joint life expectancy of the IRA owner and their designated beneficiary
    
  • Annuitizing by dividing the IRA balance by an annuity factor
    
  • Taking required minimum distributions (RMDs) calculated over the IRA owner’s life expectancy or the joint life expectancy of the IRA owner and their beneficiary
    
    

Note: If the payment amount changes before the end of the required substantially equal periodic payment schedule, the tax penalty applies to all distributions, including any previous ones. However, account owners may make a one-time change from the amortization or annuitization calculation method to the RMD method, which may reduce the amount of their distributions.

Note: If an account owner depletes their account before the end of the required distribution period, they will not be subject to the tax penalty.

• Tuition
• Mandatory fees
• Required textbooks, supplies and equipment
• Reasonable costs for room and board

Account owners must report this exception when filing their taxes. Consult a tax advisor to determine whether a specific expense is qualified.

• Ordered or called to active duty after September 11, 2001
• Ordered or called to active duty for 179 days or more
• The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active-duty period

Capital Group does not determine whether a distribution meets the IRS requirements to avoid the early distribution penalty. Capital Group reports all other distributions before the age of 59½ as early distributions on Form 1099-R. Account owners must report any exceptions when filing their taxes.

Consult IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) or a tax advisor for more information or with any questions you may have on exceptions to early distribution penalties.