Question: I need to withdraw funds from my retirement plan account now. How can I avoid the 10% penalty tax?

Answer: The government intends that your IRAs and qualified plans be used for your retirement, not on an as needed basis. Therefore, the law imposes a penalty for early withdrawals. If you withdraw money from your IRA or qualified plan before reaching 59 ½, you will generally be subject to a 10% excise tax. Moreover, all amounts withdrawn will normally be subject to ordinary income tax.

There are, however, some exceptions where you will not be subject to the 10% excise tax if you take an early distribution from your retirement plan account.

There are about 10 permitted exceptions ranging from death to divorce.

One exception to note is the ‘substantially equal payments’ exception. If you begin to take distributions that are part of a series of substantially equal payments based upon your life expectancy, the 10% penalty tax does not apply. There are three methods to determine the payments, but in all cases, the payments must continue until the later of the individual reaching 59 ½ or 5 years. If during that time, the payments are changed or stopped, the 10% penalty will apply.

Comment: The IRS also gives an exception for those who are facing a disability.