Withdrawals From an Account

What Are The Exceptions to the Federal Penalty Tax?

The additional 10 percent federal penalty tax does not apply to all nonqualified withdrawals. Generally, nonqualified withdrawals made on account of the following are not subject to the 10 percent federal penalty tax:

  • The death of the beneficiary
  • The disability of the beneficiary within the meaning of Section 72(m)(7) of the Code;
  • If the beneficiary receives a scholarship, allowance or payment described in Section 25A(g)(2) of the Code, to the extent the withdrawal does not exceed the amount of the scholarship, allowance or payment;
  • If a Hope Scholarship Credit and/or Lifetime Learning Credit is allowed to any person for payment of the Beneficiary's Qualified Higher Education Costs, the Earnings Portion of the part of the Nonqualified Withdrawal equal to such expenses will not be subject to the penalty tax.
  • If the beneficiary attends the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the nonqualified withdrawal does not exceed the costs of “advanced education”, as that term is defined in 10 U.S.C. Section 2005(e)(3), attributable to such attendance.

You should consult your tax advisor regarding the application of any of the above exceptions. See Exhibit B − Tax Information.