Navigating the Public Safety Worker 10% Penalty Exception – Know the facts or it could cost you!!

The Trade Priorities & Accountabilities Act of 2015 (1), along with the Secure ACT 2.0 enacted new rules for qualified first responders for taking distributions from a “qualified” retirement plans, which can allow you to avoid the IRS 10% early withdrawal penalty, but there is a ton of misinformation out there about what you can and can’t do.  It is so important to understand the rules to avoid costly early withdrawal penalties from the IRS which could severely hamper your future retirement.

In our financial wellness class “Building Financial Strength in First Responder Families” we stress the importance of becoming an expert in everything related to your retirement.  All to often first responders just “trust” someone and you can’t do that.  What did Ronald Reagan say – “TRUST BUT VERIFY”!!!

FinancialCop is also aware of folks out there teaching about this very topic to our brothers and sisters, that unfortunately may also be spreading bad information that just isn’t fully truthful and it is so important to know what can you do, and what can get you in trouble. Just “trusting” someone and not verifying the facts could get you into some serious financial trouble!  So lets explore what you really can, and cannot do!

Who Qualifies for the Public Safety Worker 10% Penalty Exception?

The IRS recognizes the unique nature of public safety work and offers a special rule allowing early access to retirement funds. To qualify for this exception, you must be a qualified public safety employee. (2)

It’s important to check with your retirement plan administrator to confirm if your role qualifies under the plan’s specific guidelines.

Key Eligibility Criteria

1. Separation from Service:
   • You must have separated from service with your employer during the year you turn 50 or later.
2. Age Matters:
   • You need to be at least 50 years old when you take the distribution.
   • This means you’ve retired or left your job with the agency where you worked as a public safety officer after turning 50.
3. Eligible Retirement Plans:
   • The exception only applies to certain types of retirement accounts, including governmental Pensions (think DROP or Lump Sums), 457(b) plans, 401(k) or (a)’s, and 403(b)s.

What You Can Do

If you meet the above criteria, you’ve earned the right to make early withdrawals without penalty from your retirement accounts. Here’s what’s allowed under the 10% penalty exception:

1. Withdraw Penalty-Free:
   • Once you hit the age milestone and have separated from service, you can start taking money out of your eligible retirement plan without paying the typical 10% penalty for early withdrawals, but income taxes may apply depending on the account (pre-tax or ROTH).
2. Access 401(k), 403(b), and Governmental 457(b) Plans:
   • These types of retirement plans tied to your public safety service are fair game.
3. Withdraw the Amount You Need:
   • You have the flexibility to take out a partial amount or the entire balance. Keep in mind that regular income taxes still apply to what you withdraw, but you avoid the additional 10% penalty.

What You Can’t Do

While this rule offers a huge financial advantage, there are limits. Here’s what to steer clear of to stay compliant:

1. NO Early IRA Withdrawals – I repeat NO early IRA Withdrawals!!!:
   • The 10% penalty exception does not apply to IRAs, including Traditional IRAs, Roth IRAs, SIMPLE IRAs, or SEP IRAs. If you pull money out of these accounts before age 59½, you’ll face that 10% early withdrawal penalty unless another exception applies.
2. You Must Stop Working:
   • To qualify, you must have separated from service with your employer. That means you need to have left or retired from your public safety job in the year you turn 50 or later. You cannot still be working with the same employer and take early withdrawals without a penalty.
3. Non-Public Safety Plans Don’t Qualify:
   • If you have a retirement plan from previous private-sector jobs or other non-public safety work, those plans won’t qualify for the 10% exception—even if you meet the age and separation conditions.
4. No Penalty-Free Withdrawals Before Age 50:
   • If you’re thinking of taking out money before you turn 50, stop right there. The 10% penalty will still apply if you take distributions too early, even if you’re planning to retire soon or have already separated from service.

FinancialCops Tips for Smart Withdrawals

The first thing to do when it comes to taking withdrawals is to consult with a good CPA that understands your taxes, the federal rules, and your state rule when it comes to your taxes!! Before you jump into taking early distributions, take a minute to weigh the financial implications. Yes, you may avoid the penalty, but remember:

• You’ll still owe income taxes on the money you withdraw. If you take out a large amount in one year, it could push you into a higher tax bracket, resulting in a bigger tax bill (hence consulting with that CPA).
• Early withdrawals reduce your retirement savings, meaning less money for when you fully retire. Be sure that you really need the money now, and consider other sources of income or financial assistance first.  All to often if we take out money early, we aren’t retired, which means we are ultimately going to affect our retirement!!

Final Verdict

The Public Safety Worker 10% Penalty Early Distribution Exception is a powerful tool for those who’ve served as first responders or in other qualifying roles. It allows you to access your hard-earned retirement savings sooner, without the sting of extra penalties. But like any legal rule, understanding the fine print is key. Stick to the eligibility guidelines, avoid withdrawals from ineligible plans like IRAs, and always consult with a professional to ensure you’re making the most of this financial opportunity.

Stay safe, financially and out there protecting and serving, by making sure you’re taking advantage of every benefit that applies to you. After all, you’ve spent your career protecting others—now it’s time to protect your financial future.

If you have any questions or need personalized financial advice, don’t hesitate to reach out to FinancialCops for expert guidance at www.finanicalcop.com

(1) Trade Priorities & Accountabilities Act of 2015

(2) Qualified public safety employee