Berge & Berge, LLP Blog

Saturday, March 26, 2016

California Law Makes Early Withdrawals From an IRA Even More Costly

When can you withdraw from an IRA without penalties?

After years of savings, investment and compound interest, an IRA account can be a tempting source of emergency funds. Many wonder if there is some way to tap into their savings before retirement without triggering taxes or penalties. There are some exceptions, but early withdrawals can often prove costly, especially in California.

When a person withdraws funds from an IRA before age 59 1/2, this "early" withdrawal may be subject to penalties. There is usually a 10% penalty, in addition to any tax due on the funds. The penalty can be even higher —25%—for a specific type of matching savings incentive plan for employees known as a SIMPLE IRA.

There is an additional California early withdrawal penalty equal to 2.5% of the early distribution for account holders. For holders of a SIMPLE IRA who make withdrawals within the first two years of starting the account, the California penalty is 6%.

There are some exceptional circumstances in which an IRA owner can take distributions without penalties, both at the Federal level and in the state of California. These include:

  • Distributions taken after a permanent disability
  • Distributions to pay expenses for medical insurance when you're unemployed
  • Distributions for unreimbursed medical expenses greater than 10% of your adjusted gross income.
  • Distributions to pay certain higher education costs
  • Distributions (up to $10,000) to pay for a first home.
  • Distributions to military reservists called to active duty
  • Distributions to certain qualified public safety employees

Depending the type of IRA involved, you may still owe taxes on these distributions even if there are no added penalties.

If you withdrew funds from an IRA and believe you are covered by one of the exceptions, you need to make sure your actions are fully disclosed in your federal and state income tax returns so that both the IRS and the California Franchise Tax Board understand why you are exempt. You may also want to confer with your professional estate planning tax advisor.

Archived Posts


Estate Planning and Elder Law News

© 2019 Law Offices of Berge & Berge LLP | Disclaimer
1101 S. Winchester Blvd, Suite I-208, San Jose, CA 95128
| Phone: (408) 389-6980

The LifePlan Program | Estate Planning | Estate Tax Planning | Business Succession Planning | Probate / Estate Administration | Elder Abuse/Conservatorships | Trust and Estate Planning | Public Benefits | Special Needs Planning | Trust Administration | | About Us | Forms | Resources

Law Firm Website Design by
Amicus Creative