Qualified Reservist
Candlefocus EditorQualified reservists are allowed certain specialized tax benefits, including the ability to make tax-free withdrawals from certain retirement accounts. These withdrawals are considered to be pre-tax exceptions and can be made without incurring the 10 percent early withdrawal penalty. The withdrawals are still subject to state and federal taxes, however, as is all other income.
The Tax Cuts and Jobs Act of 2017 also added an additional benefit for qualified reservists. It allows them to treat any period of active duty of more than 179 days in a tax year as an exclusion from gross income. This means that any income earned during the active duty period is exempt from federal income tax.
Qualified reservists have the option to make withdrawals from their retirement accounts for up to five years after their active duty period. This allows them to pay for various expenses such as moving, education or emergency expenses. However, it is important to note that these withdrawn funds are still subject to state and federal taxes and do not carry the same protection from early withdrawal penalties that other retirement income does.
The rules for qualified reservists are quite generous, but service members should be aware of the potential long-term consequences of making early withdrawals. While, in the short term, this may help you cover the costs of education, moving and other expenses, missing even one year of retirement savings can end up having a major effect later on. It is important to carefully review all available alternatives and make sure the choice to withdraw money from retirement accounts is the right one.