The Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty if you take a distribution from a qualified retirement plan (such as the Basic Retirement Plan or 403(b) SRA) 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 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.
Roth 403(b) SRA Distributions
Qualified distributions from the after-tax Roth 403(b) are not subject to the 10% early withdrawal penalty. However, the penalty generally applies to nonqualified distributions of after-tax Roth 403(b) SRA amounts made prior to age 59½ unless an exception is met.
Exceptions to the 10% 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, which 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. Important: This exception to the penalty does not apply to an IRA. If you rollover your U-M retirement 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.
- You become totally and permanently 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.