What Is a Qualified Reservist?
Let me explain what a qualified reservist is. If you're a member of the military reserve and not on active duty, but you get called up, you might qualify to pull money from your retirement accounts without facing the usual early withdrawal penalty.
Normally, the IRS hits you with a 10% penalty on taxable amounts you withdraw from retirement accounts if you're under 59½. But as a qualified reservist, you're an exception to that rule. Keep in mind, though, that you'll still owe federal and state taxes on those withdrawals.
To qualify, you need to be ordered or called to active duty after September 11, 2001, and it has to be for more than 179 days or an indefinite period. The money has to come from an IRA or from your elective deferrals to a 401(k), 457, or 403(b) plan. Plus, you can only take the distribution while you're on active duty.
There are rules that let you repay those distributions back into your retirement account within two years after your active duty ends, and you can even go over the usual annual contribution limits when you do that.
Key Takeaways
When you're a qualified reservist called to duty, you can make withdrawals from certain retirement accounts without the penalty—though they're not entirely tax-free since taxes still apply.
These rules came about fairly recently with the Pension Protection Act of 2006, and at first, they only covered active reservists up to December 30, 2007. Many service members use this option for early distributions, but it can hurt your retirement savings in the long run.
Your withdrawals remain subject to state and federal taxes. The major downside is that skipping even one year of contributions to your 401(k) or IRA can make a big difference when you retire.
Understanding Qualified Reservists
These qualified reservist rules are relatively new—they were part of the Pension Protection Act of 2006. Initially, they applied only to those on active duty on or before December 30, 2007. Then the 2008 HEART Act, or Heroes Earnings Assistance and Relief Tax Act, extended them for reservists moving forward.
The HEART Act provides various financial aids to U.S. service members and their families as a way to thank and compensate them for their service. It includes provisions to help with the financial shift into active duty and back to civilian life.
Pros and Cons of Being a Qualified Reservist
Serving in the reserves can bring financial challenges. For example, if you're in a married couple with kids, you might face sudden childcare costs when one or both parents are deployed overseas. The qualified reservist rules, like other HEART Act provisions, give you more financial flexibility in those situations.
That said, there are restrictions you need to know. Once you take a distribution, you can't make further elective contributions to your retirement plan after that date. This can negatively affect your retirement nest egg.
The biggest drawback is that missing out on even a single year of savings in your 401(k) or IRA can impact your retirement significantly. This is particularly true early on, because the money you withdraw won't compound over the years. Even pulling out a few thousand dollars could cost you $10,000 or more in the long term.
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