During tough times like these a lot of people are running into situations where they may h ave to take an early distribution from their retirement plan to help pay for bills, a home mortgage or some other expense. While it’s not typically something you should probably do, in some cases it’s unavoidable. Today I thought I would look at some quick facts about early distributions, sent to me by the IRS.
Top Ten Facts about Taking Early Distributions from Retirement Plans
When you take an early distribution from your retirement plan there will often be a tax impact and penalty to taking money out early. Here are ten facts about early distributions that the IRS sent out in their monthly newsletter.
- Payments you receive from your Individual Retirement Arrangement (IRA) before you reach age 59 ½ are generally considered early or premature distributions.
- Early distributions are usually subject to an additional 10 percent tax.
- Early distributions must also be reported to the IRS.
- Distributions you rollover to a rollover IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
- The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
- If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
- If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
- If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
- There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.
- For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Those are 10 quick facts about taking an early distribution on your retirement account, important points to remember.
Important points to remember:
- If you take an early distribution, usually there is going to be a hefty 10 percent penalty to pay.
- The distribution may be taxable and you’ll need to pay taxes at your normal rate on the money.
Right away not only are you losing the money from your retirement account and losing the effects of compounding interest, you’re also taking a hit through the tax penalty and taxes you’ll need to pay. Sometimes that can be a 30-40% hit! So if you can avoid taking money out early, do it! Otherwise, try to pull money from non-taxed accounts like your Roth IRA.
Have you taken money out of a retirement account before you reached retirement age? Did you end up having to pay taxes and penalties, or did you fit into one of the exceptions? Tell us your thoughts in the comments!