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When a U.S. Tax Court judge rules that a tax lawyer can’t rely on an IRS publication in his defense you know the rest of us are in deep trouble. The trouble is that Congress has created more than a dozen different types of retirement plans, each with their own nuances.
Early Withdrawal Blues
There are a number of early withdrawal penalty exceptions. But watch out: if you think you can take money from a 401(k) to pay for college or graduate school bills, or to buy a first home, think again. Those penalty exceptions only apply to IRA withdrawals.
Another common mistake is thinking that because your 401(k) allows you to take a “hardship withdrawal” you’re exempt from the 10% penalty tax – you’re not.
Transfer on Death Traps
The biggest area for mistakes of course is the transfer from the original account holder to the beneficiaries. There are many crucial elections and steps to take. If you get something wrong, 100% of the account could end up as taxable income right away.
This is one reason why we offer the powerful Stand Alone Retirement Trust, which can safeguard that transfer to the next generation.