Special IRA Distribution Tax Break for Miltiary Reservists

Tuesday, March 19, 2013

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

Certain retirement plan distributions, known as Qualified Reservist Distributions (QRDs) qualify for special tax breaks. The retirement plan distribution must come from an IRA or from amounts that were contributed as salary deferrals under a 401(k), 403(b) plan or a similar plan.
 

 

Usually, if you take an IRA distribution before you are age 59 ½, you will owe income tax plus an IRS 10% penalty for an early distribution. However, there are exceptions to the 10% penalty, such as for death, disability, first home purchase, health insurance for the unemployed, deductible medical expenses, etc. Another exception to the penalty is for a QRD.

A distribution you receive is a qualified reservist distribution (QRD) if the following requirements are met:

  • You were called to active duty after September 11, 2001
  • You were called to active duty for a period of 180 days or more or for an indefinite period because you are a member of a reserve component
  • Your distribution was made no earlier than the date you were called to active duty and no later than the end of the active duty period

The term “reserve component” means the Army National Guard, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard of the United States, Air Force Reserve, Coast Guard Reserve, or Reserve Corps of the Public Health Service.

If your IRA distribution is a QRD, then the IRS 10% penalty won’t apply, but the distribution is still taxable. You have to file IRS Form 5329 to claim the exception to the 10% penalty and report the distribution on your federal income tax return (IRS Form 1040) to pay the tax.

Also, you can repay part or all of these distributions to an IRA within a two-year period after your active duty period is over. You can make these repayments even if they exceed the annual limit on IRA contributions. The repayments can be made to an IRA even if you received the QRD from a 401(k) plan. You cannot deduct repaid QRDs. If you repay a QRD, you must report it on IRS Form 8606. An alternative would be to make the repayment to a Roth IRA.

Article Highlights:

  • Qualified reservist distributions (QRDs) from retirement plans are exempt from the 10% early distribution penalty.
  • QRDs can be repaid within two years.
 

Receive Ed Slott and Company Articles Straight to Your Inbox!
Enter your email address:

Delivered by FeedBurner

 

Post Views: 133
Posted in: , , , ,

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.