# Qualified Reservist: Meaning, Pros and Cons

> **Definition**
>
> A qualified reservist is a member of the military reserve who, when called to active duty, can withdraw funds from certain retirement accounts without incurring the usual early distribution penalty.

## What Is a Qualified Reservist?

A qualified reservist is a member of the military reserve who is not active, but when called to duty, is eligible to make an early withdrawal from a retirement account without incurring the usual early distribution penalty.

Under most circumstances, the IRS imposes a penalty of 10% on the taxable amount withdrawn from a retirement account by a taxpayer younger than 59½ years old. Qualified reservists are rare exceptions to this rule. Still, their withdrawals are subject to federal and state taxes.

To qualify, reservists must be ordered or called to active duty after Sept. 11, 2001, for more than 179 days or an indefinite period. Distributions need to be either from an [individual retirement account](https://www.investopedia.com/terms/i/ira.asp) (IRA) or from employees’ elective deferrals to a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp), [457](https://www.investopedia.com/terms/1/457plan.asp), or [403(b)](https://www.investopedia.com/terms/1/403bplan.asp). Also, distributions must be during the period of active duty.

Certain rules allow reservists to repay retirement account distributions during the two-year period when active duty ends, even if the repayment contributions exceed annual contribution limits.

### Key Takeaways

*   Qualified reservists, when called to duty, can thereafter make tax-free withdrawals from certain retirement accounts.
*   Qualified reservist rules are fairly recent, enacted as part of the Pension Protection Act of 2006. Initially, the rules only applied to active reservists on Dec. 30, 2007, or before.
*   Many service people take their distributions early because of this, but it can have long-term negative effects on a retirement nest egg.
*   Retirement benefits that are taken are still subject to certain state and federal taxes.
*   Perhaps the biggest disadvantage of the qualified reservist rules is that missing even a single year of savings in a 401k or IRA can make a difference in retirement.

## Understanding Qualified Reservists

Qualified reservist rules are fairly recent, enacted as part of the [Pension Protection Act of 2006](https://www.investopedia.com/articles/retirement/06/ppa2006.asp). Initially, the rules only applied to active reservists on Dec. 30, 2007, or before. However, the 2008 HEART Act, or Heroes Earnings Assistance and Relief Tax Act, extended the rules for qualified reservists going forward.

The HEART Act gave U.S. service members and their families many [forms of financial assistance](https://www.investopedia.com/articles/pf/09/help-family-members-trouble.asp) as a further means of thanking and compensating them for their service. The HEART Act contains several provisions designed to allow service members and reservists to make a smooth financial transition both into active duty and then back into their civilian lives.

## Pros and Cons of Being a Qualified Reservist 

Serving in the reserves can present financial hardships. Married couples with kids, for instance, face unexpected childcare costs when one or both adult family members are called into active duty overseas. As with many of the HEART Act provisions, qualified reservist rules provide additional financial flexibility for reservists.

If there is a trade-off, it’s that there are important restrictions. For example, service-member employees cannot make further elective contributions to their retirement plans after the date of distribution. This can have a negative impact on a potential retirement nest egg.

Perhaps the biggest disadvantage of the qualified reservist rules is that missing even a single year of savings in a 401k or IRA can make a difference in retirement. This is especially true early in the retirement-savings process, as the money taken out will not have a chance to compound over multiple years. For this reason, even a withdrawal of a few thousand dollars, as allowed for qualified reservists, can cost $10,000 or more over several decades.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Retirement Topics -- Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions)."
>     
> 2.  Internal Revenue Service. “[Publication 3 (2023), Armed Forces' Tax Guide](https://www.irs.gov/publications/p3).”
>     
> 3.  U.S. Government. “[Pension Protection Act of 2006](https://www.govinfo.gov/content/pkg/PLAW-109publ280/pdf/PLAW-109publ280.pdf).”
>     
> 4.  U.S. Congress. “[Heroes Earnings Assistance and Relief Tax Act of 2008](https://www.congress.gov/110/plaws/publ245/PLAW-110publ245.pdf).”
>     
> 5.  U.S. Army. “[The HEART Act](https://myarmybenefits.us.army.mil/Benefit-Library/Federal-Benefits/The-Heart-Act?serv=122#:~:text=Qualified%20Reservist%20Distributions%20from%20Retirement%20Plans&text=Service%20members%20who%20make%20withdrawals,months%20after%20taking%20the%20withdrawals.).”