Tax consequences of taking early distributions from an IRA or Retirement Plan?
Do you have an IRA or an employer sponsored retirement plan such as: 401-K, 403-B, 457, DB, Profit Sharing Plan, or other qualified retirement plans? Did you purchase a non-qualified annuity to protect your retirement assets? If the answer is yes, then you should know what would happen tax-wise, if you take the money out early (taking premature distribution)? In most cases withdrawing funds early out of a retirement plan or an IRA before 59 ½, is called “an early distribution”.
• Early distributions will be reported to the IRS on form 1099-R and subsequently you will also report it on your personal income tax return.
• Early distributions are usually subject to ordinary income taxes on both Federal and State levels. You will pay taxes based on your tax bracket. Additionally, you also will be subject to the 10 percent tax penalty.
• If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions (the amount that you contributed also referred to as basis) is not subject to income taxes or penalties. Any amount over the basis will be subject to the above taxes and penalties.
• There are several exceptions to the additional 10 percent early distribution penalty. These exceptions only apply to the IRAs. No 10% penalty applies if you withdraw the retirement money early out of the IRA for a qualified purpose such as:
– When the money is used for the purchase of a first home. (limit of 10,000 and other restrictions apply)
– When you use the money for certain medical or educational expenses. (restrictions and limitations apply)
– Most of the exceptions apply to an IRA and not to the employer sponsored retirement plans: 401-K, 403-B, 457, Profit Sharing and the like. So you will need to rollover your retirement funds from the company’s sponsored retirement plan to your IRA and then take early distribution for the qualified purpose above. If you don’t have an IRA you can open one at any financial institutions.
Links:
• Publication 575, Pensions and Annuities
• Publication 590, Individual Retirement Arrangements (IRAs)
• Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts
IRS Circular 230 Legend: Any advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax payments or penalties. Unless otherwise specifically indicated, you should assume that any statement in this website or articles that relating to any U.S. federal, state, or local tax matter was written in connection with the promotion or marketing. Disclaimer: Any articles herein is designed for general information only. The information presented at this site should not be construed to be formal legal or tax advice. Each taxpayer should seek advice based on the taxpayer's particular circumstances.
