Aaron Charles Gregg

Are 529 Plans Part of Your Estate?

“People tend to think of ‘529’ education-savings plans as an excellent way to save and invest tax-free for college or schooling costs, and they are.”

Estate planning attorneys, accountants and CPAs say that 529s are more than good ways to save for college. They’re also highly flexible estate planning tools, useful far beyond education spending, that cost practically nothing to set up. In the very near future, the role of 529s could expand greatly, according to the article “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them” from Barron’s.

Most tactics to reduce the size of an estate are irrevocable and cannot be undone, but the 529 allows you to change the beneficiaries of a 529 account. Even the owners can be changed multiple times. Here’s how they work, and why they deserve more attention.

The 529 is funded with after tax dollars, and all money taken out of the account, including investment gains, is tax fre,e as long as it is spent on qualified education expenses. That includes tuition, room and board and books. What about money used for non-qualified expenses? Income taxes are due, plus a 10% penalty. Only the original contribution is not taxed, if used for non-qualified expenses.

Most states have their own 529 plans, but you can use a plan from any state. Check to see if there are tax advantages from using your state’s plan and know the details before you open an account and start making contributions.

Each 529 account owner must designate a single beneficiary, but money can be moved between beneficiaries, as long as they are in the same family. You can move money that was in a child’s account into their own child’s account, with no taxes, as long as you don’t hit gift tax exclusion levels.

In most states, you can contribute up to $15,000 per beneficiary to a 529 plan. However, each account owner can also pay up to five years’ worth of contributions without triggering gift taxes. A couple together may contribute up to $150,000 per beneficiary, and they can do it for multiple people.

There are no limits to the number of 529s a person may own. If you’re blessed with ten grandchildren, you can open a 529 account for each one of them.

For one family with eight grandchildren, plus one child in graduate school, contributions were made of $1.35 million to various 529 plans. By doing this, their estate, valued at $13 million, was reduced below the federal tax exclusion limit of $11.7 million per person.

Think of the money as a family education endowment. If it’s needed for a crisis, it can be accessed, even though taxes will need to be paid.

To create a 529 that will last for multiple generations, provisions need to be made to transfer ownership. Funding 529 plans for grandchildren’s education must be accompanied by designating their parents—the adult children—as successor owners, when the grandparents die or become incapacitated.

The use of 529s has changed over the years. Originally only for college tuition, room and board, today they can be used for private elementary school or high school. They can also be used to take cooking classes, language classes or career training at accredited institutions. Be mindful that some expenses will not qualify—including transportation costs, healthcare and personal expenses.

Reference: Barron’s (May 29, 2021) “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them”

The SECURE Act and Your Retirement

“While most of us had stockings and menorahs on our minds, President Trump on Dec. 20 signed the Secure Act that makes the most significant changes in retirement accounts we’ve seen in years.”

For anyone who has saved a high six- or seven-figure balance in their retirement accounts, the SECURE Act will definitely affect their retirement plans. That includes 401(k)s, 403(b)s, and other workplace plans, as well as traditional IRAs and Roth IRA accounts. The article “How the new Secure Act affects your retirement” from the Daily Camera provides a clear picture of the changes.

Stretch IRAs are Curtailed. Anyone who inherited an IRA (traditional or Roth) from a parent before 2020, may take Required Minimum Distributions (RMDs) from those accounts over their own life expectancy. Let’s say a parent died when you were 48—you could stretch those distributions out over the course of 36 years. This option gave heirs the ability to spread income and the taxes that come with the income out over decades—with little distributions having little impact on taxes. If you inherited a Roth IRA, you could benefit from its tax-free growth over your entire lifetime.

All that’s changed now. A non-spousal heir (or one who is disabled, chronically ill or a minor child) now has ten years in which to take their distributions. They have to pay ordinary income taxes on the amount they take out, over a far shorter period of time. Newly inherited Roth IRAs have the same rules, but usually there are no taxes due. If a minor inherits an IRA, once they reach the age of majority, they have ten years in which to take their distributions.

A Small Break for Required IRA Distributions. Until the SECURE Act, retirees had to start taking their RMDs out of IRAs soon after turning 70½. The new age for taking RMDs is now 72 for those who are younger than age 70½ at the end of 2019. This won’t alter the plans of most retirees, since they usually start taking those distributions well before age 72 to cover expenses. Roth IRAs have another benefit: they continue to escape distribution requirements, unless they are inherited.

No Age Cap for Traditional IRA Contributions. Workers may now continue to contribute funds into a traditional IRA at any age. Before the SECURE Act, workers had to stop contributing funds once they turned 70½. Note that you or your spouse are still required to have earned income to put funds in a traditional or Roth IRA.

Other Changes. There are many more changes from the SECURE Act and thought leaders in the estate planning community will be reviewing and analyzing the law for months, or perhaps years, to come. Some of the changes that are widely recognized already include the ability to withdraw $5,000 penalty-free from retirement plan accounts per newly born or adopted child, although in most cases, income tax will need to be paid on the withdrawal.

Section 529 educational savings accounts can be used, up to a lifetime limit of $10,000 per student, to pay off student loans. In most states, this will be considered a non-qualified withdrawal and state income taxes will be due, but at least the money can be used for this purpose.

Lastly, there are new tax credits available to smaller companies that set up new retirement plans, and there are new rules regarding including part-time employees in company sponsored 401(k) plans.

The changes from the SECURE Act, particularly regarding the loss of the IRA Stretch, have created a need for people to review their estate plans, if they included leaving large retirement accounts to their children. Speak with your estate planning attorney to ensure that your plan still works.

Reference: Daily Camera (Jan. 11, 2020) “How the new Secure Act affects your retirement”

How Should I Prepare for My Child’s Future?

“A recent survey by TD Ameritrade made headlines, with its finding that 1 in 5 young Americans (Generation Z, defined by the researchers as ages 15-21, and young millennials, ages 22-28) may opt out of college. A deeper look shows that much of what drives that thinking, is the price and debt that come with it.”

It’s been a common path for millennials and their predecessors to go to a four-year college and get a job. If they were short on funds, they’d take out some loans. However, there have been some signals that this norm is changing.

With worries about a student debt crisis and with the experience of recent graduates, new college-age students are increasingly turning to alternatives to the established route to create their own debt-free future.

Kiplinger’s recent article entitled “How to Stay Flexible in Saving for Your Child's Future” says that student debt is leading to obstacles, when it comes to achieving major milestones of financial freedom. Of the young millennials surveyed, nearly half (47%) said they delayed purchasing a home because of their debt, 40% delayed saving for retirement and 31% waited to move out of their parents’ home. A total of 28% of parents said they delayed saving for their own retirement, to pay for their children’s education.

Saving for a child’s future now looks different than when these 18-year-olds were born. It certainly will be the case, when they leave the nest. As a result, it’s critical for parents to try to give them help, by learning how to adapt to the changing times.

With the gig economy and digitally enabled side jobs, parents have more flexibility to maintain their financial goals, while preserving their personal lives.

When considering flexibility, especially when saving for a child’s education, it’s actually one of the big benefits of a 529 plan. Although you’re responsible if you make a withdrawal that isn’t for a qualified education expense, the penalties aren’t too steep. Federal income tax is imposed on the plan’s growth, plus a 10% penalty on the growth. Therefore, depending on the amount withdrawn, the penalty may be very little.

Nonetheless, the tax penalties may worry parents enough that even when their goal is to save for their child’s education, they want to spread their savings into multiple accounts. This has some clear advantages, when the child decides not to go to college after high school. The good news is that there are plenty of options to account for both possibilities.

• Other investment accounts: You could also create a brokerage account with money earmarked for a child. This gives parents complete flexibility in how the money is used. The money can be used for expenses other than education, but the downside is not having the tax benefits of the 529 plan (tax deferral and potential tax-free growth).
• Trusts: a trust allows parents to keep complete control over the funds and lets parents provide instructions to the trustee, on how the trust can be used.
• Custodial accounts: These accounts are managed by a guardian (or custodian), until the child is an adult. These accounts are pretty easy to set up but don’t have the restrictions that can be placed on trust funds.

The digital world has changed everything, including how we plan for our children and their future. Be flexible and make your plans accordingly.

Reference: Kiplinger (Dec. 27, 2019) “How to Stay Flexible in Saving for Your Child's Future”

Should I Name a Minor as an IRA Beneficiary?

“IRAs provide better opportunities for long-term growth than other assets you could leave to a minor.”

People often leave assets to minors, but is making a minor an IRA beneficiary a really bright idea?

There are many ways to give assets to those for whom you want to leave a legacy. You can leave tangible assets. However, the age of the person to whom you leave the gift will frequently decide the form of, and the conditions under which, they receive the property. Let’s look at some of the advantages and potential negatives of leaving an IRA to a minor.
Investopedia’s recent article, “Designating a Minor as an IRA Beneficiary,” explains that there are several reasons why someone might want to give an IRA to a beneficiary who is not yet an adult. One of the most obvious is that IRAs can provide much greater flexibility and potential for long-term growth than, for example, savings bonds. IRAs also don’t have to be used for higher education or any other specific purpose in order to avoid taxation. Young beneficiaries also get the benefit of a lower required minimum distribution (RMD) over their lifetimes, as the beneficiary’s life expectancy is used when calculating their RMDs.

For example, if you died and left $100,000 of IRA money to a one-year-old granddaughter this year, her current life expectancy would be 81.6 years. Assuming that the funds in the account grow at 8% to 10% per year, she could withdraw several million dollars from the account during her lifetime. If the money were in a Roth IRA, she’d probably also save at least a million dollars in taxes.

If you leave an IRA to a minor, there must be an appointment of a guardian to manage the account, until the child reaches adulthood. Minors can’t own legal property of any kind in their name. Instead, you can appoint a guardian to manage the property on their behalf, until they reach the age of majority (18 or 21, depending on the state). If you do not do this, the court will appoint one for you—and that could be a person who may have very different thoughts about how the account should be managed and invested.

The law prohibits IRA custodians from dealing directly with minors in any capacity. A will doesn’t solve the problem because wills only deal with probate assets, and IRAs are exempt from probate. The minor’s parents or another relative can petition the court for guardianship, if you fail to make an appointment. However, this can be expensive, time-consuming and really unnecessary.

There are a couple of different ways that your beneficiary can receive the IRA. One option is to put the distributions inside a custodial account, like an UGMA or UTMA account. However, there could be adverse tax consequences for the minor’s parents (or whoever claims the minor as a dependent on a tax return) if the minor’s income is above a certain threshold. That’s because the parent or guardian must pay tax on the excess at their top marginal tax rate. This also gives the minor sole custody of the property at the age of majority, but she may not be prepared at that time to handle a large sum of money.

Another possibility is to put the money into a 529 plan. This will let the assets grow tax free, until they’re used to pay for qualified higher education expenses.

A more comprehensive solution may be to use a revocable living trust as the beneficiary for the IRA. The minor is named the beneficiary for the trust, and the guardian would be appointed as the trustee. A big benefit of a trust is that you can provide specific instructions as to how you want the guardian to handle the IRA distributions for the minor.

There are several available options, so talk with an experienced estate planning attorney about what makes the most sense for you and your family.

Reference: Investopedia (September 7, 2019) “Designating a Minor as an IRA Beneficiary”

What Can I Do with Unspent Money in a 529 Plan?

“Despite the burgeoning cost of higher education these days, you might still find yourself with unspent money in a 529 plan after your child has graduated from college. As you may know, if you withdraw the money for non-qualified education purposes, you have to pay taxes plus an additional 10% penalty on the earnings withdrawn from the account.”
Los Altos Online’s recent article, “How to use up leftover money in a 529 college savings plan,” says there several ways to use unspent money in a 529 plan, while avoiding the taxes and/or penalties. Here are some options to consider.
Graduate school. If your child is interested in an advanced degree, the money can be used tax free, just as it was for college. Any school that gets financial aid qualifies.
Another child. You can change the beneficiary of the 529 plan to another qualifying family member, without any tax implications. If you have other children, the funds can be used to pay for their qualified expenses—even if you have other 529 plans for them. Money in 529 plans can now also be used for elementary and secondary education.
Another relative. You can change the beneficiary to parents, aunts, uncles, nieces, nephews, stepparents and even first cousins. There’s no deadline for using the funds, so you can keep it as a gift for a future grandchild. However, avoid skipping a generation, because that could trigger a tax penalty.
Your own or your spouse’s career. If you’re interested in changing your career or just want to get a new degree in retirement, using leftover 529 funds will let you avoid using other savings.
Estate planning. You can choose to give a 529 account to an heir. You keep control of the account until you pass away and can continue to make annual tax-free contributions up to the gift-tax exclusion amount, provided the account value doesn’t exceed the state’s maximum limit. After you die, the value isn’t counted as part of your estate for estate taxes.
Offset any scholarships. You can withdraw any amount from the 529 plan, up to the value of all scholarships and the 10% penalty is waived, even if you apply years after the scholarship was earned. The earnings are taxable, but because distributions include both earnings and contributions, only part of this will be taxed.
Give the money to your child or spend it yourself. You could just pay the taxes and the 10% penalty and use the money as you please. The earnings are taxed at your child’s rate.
Reference: Los Altos Online (September 18, 2019) “How to use up leftover money in a 529 college savings plan”

What Do I Need to Do Financially, When We Have a Baby?

“There's a lot of prep work to complete when you're expecting a new baby. Expectant parents have a nursery to paint, strollers to buy, doctor's appointments to attend and nannies to hire.”
In addition to all the logistics involved with a new baby, new parents should also take care of financial and legal matters in the months leading up to the big day.
U.S. News & World Report’s recent article, “Financial Steps to Take When You're Pregnant” reminds us that pregnancy is a terrific time to review your financial life. It's a great time to assess your budget, emergency savings, estate planning documents and insurance needs to see if anything needs to be refreshed.
Here are a few things to do to prepare for a new baby:
Employee Benefits. Take a look at your employee benefits or have a conversation with HR to determine how much time you can take off and whether you'll be paid your salary, while on parental leave. This is important because many families are faced with higher living costs by the presence of a new baby, as well as taking parental leave that may cut their take-home pay. New parents may have to use the Family and Medical Leave Act (FMLA), which offers eligible employees 12 weeks of unpaid leave; or tap short-term disability insurance, which typically only replaces a portion of your salary. The amount you receive in short-term disability will also be impacted by whether you pay premiums with pretax or post-tax dollars. If you pay with pretax, your benefit will be subject to taxes, which will decrease the overall amount received.
While reviewing these policies, look at your health insurance and see whether prenatal visits and pediatric care are covered. You could be liable for health insurance premiums, if you're taking leave from work. Remember that you'll need to add your baby to your medical insurance within 30 days of the birth.
Budget. Calculate new baby expenses, such as childcare.
Life Insurance. Determine if your current life insurance will meet your needs. If you need more, look at term life insurance. It’s usually affordable and expires after a set term, typically anywhere from 10 to 30 years. This policy payout would help a surviving parent or a guardian care for your child.
Estate Planning. Consider who would care for your child, if both parents were to die before he or she turns 18. Talk to family or close friends about who you'd like as guardian of the child. Talk to an estate planning attorney to update (or create) a will and guardianship choices. In addition, ask about formulating a plan for how inheritance, insurance and other assets will be handled and disbursed, if you die while the child is a minor. A testamentary trust is a way to direct a future inheritance. You can designate your child as the beneficiary and a relative or close friend as the trustee. The trustee will help decide how the money is spent. This trust is usually included in the will and activates after the death of the person who created it.
Beneficiary Designations. Update any beneficiary designations on your retirement and insurance accounts.
529 College Savings Account. You should also look into funding a 529 college savings account. However, making certain that your budget, estate, and insurance needs are tailored to meet your new family dynamic are more pressing concerns.
Reference: U.S. News & World Report (August 29, 2019) “Financial Steps to Take When You're Pregnant”

Do I Have to Report the Value of a 529 Plan on My State Taxes?

“Certain kinds of beneficiaries may owe the New Jersey inheritance tax.”

Does the value of a 529 plan need to be reported on the New Jersey state inheritance tax filing?

That was the question asked in nj.com’s recent article, “Does a 529 plan become part of someone's estate? Is inheritance tax due?”

A 529 plan is an investment account created pursuant to Section 529 of the Internal Revenue Code and state law. At first, 529 plans were a popular way for families to put away funds for college or other post-secondary educational expenses. The recent 2017 Tax Act has now broadened the plans’ scope to include saving for elementary and high school education.

The short answer is no, 529 plan earnings need not be reported on taxes. These plans are exempt from income tax, if they’re used for qualified education expenses. This includes tuition, fees, books, supplies, equipment, along with room and board at eligible institutions.

Any distributions for anything other than qualified education expenses, will result in the earnings being taxed to the recipient with a 10% penalty.

A contribution to a 529 plan is deemed to be a gift by the contributor to the beneficiary, despite the fact that the custodian on the account can withdraw the funds in the account, subject to tax consequences.

The custodian may also transfer all or some of an account to another beneficiary without tax consequences, but that subsequent designated beneficiary must be a member of the prior beneficiary's extended family, as defined in the Tax Code.

As far as estate taxes are concerned, an interest in a 529 plan typically isn’t included in a decedent's gross estate for federal estate tax purposes.

However, there are some exceptions to this rule.

In addition, an interest in a 529 plan may be subject to any state inheritance tax. For example, in New Jersey, the general rule is that the plan is subject to state inheritance tax, unless the relationship between the owner/custodian and the beneficiary is very close—only Class A, which includes grandparents, parents, spouses, descendants or stepchildren.

Reference: nj.com (October 19, 2018) “Does a 529 plan become part of someone's estate? Is inheritance tax due?”

Don’t Make These Mistakes with Your 529 College Savings Plan

“Investing in your child’s education is one of the most important things you can do for your child. A 529 plan enables you to start saving early—the earlier the better—so you can allow the money you invest to make more money for you and your child.”

The new tax law passed at the end of last year, allows you to deposit money in a 529 plan to save for K-12 education costs. However, as Investopedia’s reports in its article, “Top 7 Mistakes to Avoid on Your 529 Plan,” many professionals maintain that college savings is its best use.

However you use it, there are some things you want to avoid, if you want your 529 investment to pay off when your child is ready to go to school. Here are the top seven mistakes that could cause problems:

1. Failing to First Consider Your State Plan. The number one mistake is picking the wrong plan. When you do your research, begin with your state plan first to see what it offers. Every state offers at least one 529 plan, but they vary. A big benefit with your state plan is that your contributions in more than 30 states can result in a tax credit to lower your annual state tax bill. If you reside in one of five states (Pennsylvania, Arizona, Maine, Kansas or Missouri), you can invest in any state’s plan and still get the tax benefits they offer.
2. Not Understanding Your State’s Guarantee. There are states that provide prepaid tuition plans. However, not all tuition guarantees are identical. Some states offer the chance to lock in tuition fees, provided that your child chooses to go to an in-state school. It is important to use caution, because many states that make this guarantee, don’t guarantee your returns. If your returns fall short, there may not be sufficient funds, even at the guaranteed tuition rate.
3. Failing to Watch Fees and Expenses. Fees and expenses can have a big effect on the success of your investment. Research done by the Financial Research Corporation found that the average annual fee for a 529 plan is 0.69%, if purchased directly from a state. Those 529 plans purchased through brokers average 1.17%. That difference in fees adds up over time.
4. Forking Out Money for Unnecessary Penalties to Switch Plans. If you start out in a 529 plan and realize you’ve made a mistake, you can switch plans. However, use care to avoid penalties and taxes. You are allowed only one penalty-free rollover into a new 529 in any 12-month period. The one exception is if you want to change the family member who’ll benefit from the plan. It’s wise to avoid any risk of penalty or taxes, by working with the new plan administrator to coordinate the transfer. There are other fees in some states, like a recapture tax on past tax deductions, if you do an out-of-state rollover and fees to provide rollover services. Ask about all possible fees, if you are thinking of changing 529 plans.
5. Incorrectly Withdrawing Funds. When you’re ready to start using the funds for your child’s education, be sure you withdraw those funds correctly. The money can only be spent on qualified higher education expenses (QHEE), and if you don’t follow the rules, it can result in taxes and penalties. You should also remember that if you withdraw money before your child enrolls in college, you’ll pay taxes on the money—including an additional 10% penalty on any earnings (not your original deposit). Don't remove the money before your child enrolls. Then just withdraw what’s needed to cover the child's QHEE.

Consider all grants and scholarships when figuring out the amount of money you can withdraw in any one year. You are required to subtract money your child receives from other sources, before taking out 529 funds. If you take out too much, the overage will be deemed taxable income, and you’ll have to pay that additional 10% penalty on the earnings. If your child doesn’t need the money, you’re allowed to transfer the money to another family member without any tax or penalty. You can also save it in the fund for the child's future use, such as graduate school.

6. Non-Qualified Expenses. There are some common college costs that do not qualify as expenses for 529 money, like student loan pay-offs or transportation costs.
7. Delaying Contributions. That’s always a big mistake. Begin saving for college as soon as your child is born. You, as well as other family members, like grandparents, can make contributions to the 529 plan. Research your options carefully. However, if you make a mistake you can switch plans later.

Reference: Investopedia (May 29, 2018) “Top 7 Mistakes to Avoid on Your 529 Plan”

How About Spending an Hour and Saving Some Money?

“Sometimes money is like technology. Getting stuff done—whether it’s updating an operating system or moving a bank account—often takes longer than it should.”

Money chores can be time-consuming, but there are some that can be done a lot quicker than you may think.

The Washington Post’s recent article, “Got an hour? Chalk up 4 quick financial wins,” gives us a couple of financial tasks that could save you a lot of money and stress in the future. Each of these can also be accomplished in 15 minutes or less, once you’ve decided on a plan and have your information ready.

Adjust Your Withholding. With the tax reform legislation passed last year, you should look at the new tax brackets and the elimination of deductions. It could mean that you’re withholding too much or too little.

Draft Powers Of Attorney. You should have at least two estate planning documents. You grant the authority to those you name to make decisions for you, if you become incapacitated. With a medical power of attorney (also known as an advance health care directive), name your toughest advocate—the person who’s devoted enough to carry out your wishes and stand up to doctors or any of your relatives who disagree. With a financial power of attorney, you designate the individual who’s good with money and extremely ethical.  You should also name backups to both positions.

Start College Saving. If you have children, they’re going to need some schooling or post-secondary training to succeed. Consider a state-run 529 college savings plan to save. You don’t have to use your own state’s plan, so if you don’t qualify for a tax benefit in your own state, look at one of the plans Morningstar named as best in the country. These were Illinois’ Bright Start Direct-Sold College Savings Program, Nevada’s The Vanguard 529 College Savings Plan, Utah’s my529 and Virginia’s Invest529 plan.

Roll Over A Retirement Account. If you have a good 401(k) plan at work, ask if they’ll accept a rollover from your previous job’s account. If they do, ask for assistance in getting started. You can also roll your old 401(k) into an IRA, where you’ll typically have more investment options.

Reference: Washington Post (September 10, 2018) “Got an hour? Chalk up 4 quick financial wins”

When is it Worth Incurring a Penalty for Early Withdrawal?

“Many savings and investment accounts come with rules around when you can pull out your money. However, there are exceptions in which the penalty is worth the reward. There are times when you might be able to lessen the consequences.”

You hear it all the time: “early withdrawal penalties apply.” When you have retirement accounts and CDs, it’s usually not advised. However, there are some instances when it makes sense.

CNBC’s recent article, “Sometimes, early withdrawal penalties don't apply”, explains that we dutifully follow these rules to avoid the much dreaded early withdrawal penalty. However, there are cases when the penalty might not apply to you, or times when the benefits outweigh the financial hit. You should remember that these moves should often only be made if necessary, because they place your savings in jeopardy.

Certificates of Deposit. If your CDs are growing at less than 1% a year at a bank, but the bank across the street is offering annual returns of 1.72% on their certificates of deposit, you might consider an early withdrawal, despite a penalty of three months interest. Do the math: you might be ahead financially after three months, at the other bank's higher interest rate.

529 Plans. There's no early withdrawal from a 529 plan—the tax-advantaged account that can be used for education-related expenses. That’s because there are no rules as to when you can use the money. The rules stipulate only what you can use it for, which is just education-related expenses. There’s a penalty, if you use it for other reasons. It’s a 10% tax penalty, as well as income taxes on the account's earnings. In many cases, the family’s no worse off than they'd be in a taxable account. However, you may have to repay the state income tax benefits you received for using the account. If your child does plan on going to college, the withdrawals will leave your savings with less time to compound.

Retirement savings. An early withdrawal from your retirement account is a huge black eye in personal finance. Using an individual retirement account (IRA) or 401(k) plan before the age of 59½ can mean a 10% penalty, income taxes and a depleted fund for your retirement. There are several exceptions to the 10% penalty, eliminating that expense when you withdraw early from your retirement account. However, there's confusion about when the penalty does and does not apply. For example, if you decide to retire at 56, you can withdraw from your 401(k) without any penalty. However, if you roll it into an IRA, you'd have to wait until 59½ to have your money without consequences.

Both 401(k) plans and individual requirements waive the penalty. if you're using the money for serious medical expenses, or if there's a disability or death. You can use your IRA to fund health insurance, if you're unemployed, without penalty. If you're divorcing, you may be able to use 401(k) assets without a penalty.

Reference: CNBC (August 21, 2018) “Sometimes, early withdrawal penalties don't apply”