ARTICLE TAKEAWAYS
A distribution is the withdrawal of assets from an IRA that may result in tax consequences and penalties. Distributions to IRA owners under the age of 59½ are considered early distributions. Deductible contributions and earnings are subject to taxes, and unless an exception applies, a 10% early distribution penalty will be incurred. For SIMPLE IRAs, if the participant has not been in the plan for at least 2 years, the penalty increases to 25%.
The IRS early distribution penalty does not apply if the distribution falls under certain exceptions. These exceptions are referred to as 72(t) provisions because they fall under Internal Revenue Code (IRC) Section 72(t).
* 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 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.
Investors may also provide the necessary documentation to the IRS when filing their taxes.
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, investors 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.
Investors must report this exception when filing their taxes. Consult a tax advisor to determine whether a specific expense is qualified.
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. Investors 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.
For financial professionals only. Not for use with the public.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
The guidelines and procedures provided in the Account Resource Center may not apply to networked accounts or accounts not directly held by American Funds. The guidelines and procedures provided also apply only to those retirement accounts or Coverdell ESAs invested in American Funds with Capital Bank and Trust Company (CB&T) as custodian. The guidelines and procedures provided in the Account Resource Center do not apply to plans held in our retirement plan solutions — PlanPremier, PlanPremier-TPA or RecordkeeperDirect. Information on the Account Resource Center may change periodically, and previously printed information may not be current. Please refer to capitalgroup.com for the most current information available.
Financial professionals should always contact their back office to determine if there are any restrictions on the use of American Funds products, tools, services, websites and literature.