Many people may need to take out money early from their Individual Retirement Account or retirement plan. Doing so, however, can trigger an additional tax on early withdrawals. You would owe this tax on top of other income tax you may have to pay. Here are a few key points to know:
- Early withdrawals. An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.
- Additional tax. If you took early withdrawals from an IRA or retirement plan, you must report them when you file your tax return. You may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal. This amount is shown separately on your personal return as an early withdrawal penalty.
- Nontaxable withdrawals. The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that you paid tax on before you put them into the plan.
- Rollover. A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. You normally have 60 days to complete a rollover to make it tax-free.
- Exceptions. There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
- Disaster Relief. If you live in certain disaster areas, you may have relief from the 10-percent early withdrawal tax on early withdrawals from your retirement accounts.
- File Form 5329. If you took early withdrawals last year, you may have to file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax returns.
For more information on early withdrawals from retirement plans, always consult a Certified Public Accountant. Submitted by: Dennis Gallant, Senior Manager, Tax Services, Thomas Howell Ferguson P.A. CPAs. To ask Dennis a question, contact her here.