What You Need to Know about Early Withdrawal from Retirement Accounts

If you are saving for your retirement using vehicles such as IRA and/or 401(k), there are limitations on when investments can be withdrawn from these accounts. Since these are tax deferred accounts, either contributions (401(k) and Traditional IRA) or growth (Roth IRA), or both (401(k) and Traditional IRA) will be taxed at the time when withdrawals are made in the future. For both tax deductible IRA accounts (Traditional IRA) and 401(k) accounts, the age for penalty free withdrawal is 59.5 (find out more about key differences between Traditional and Roth IRAs). If under certain circumstances (such as those discussed in the 401(k) debit card post) the plan participant decides to withdraw money from his/her retirement savings accounts before reaching the age of 59.5, penalties will be imposed based on IRS rules.

If you took any premature distributions from your IRA or 401(k) last year, there are things you need to know about your withdrawals and possible tax consequences. To help better understand early withdrawal from retirement savings accounts, the IRS recently published some facts about early withdrawals:

  1. Payments you receive from your Individual Retirement Arrangement before you reach age 59.5 are considered early or premature distributions.
  2. Early distributions are usually subject to an additional 10% tax.
  3. Early distributions must be reported to the IRS.
  4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10% tax if the rollover is completed within 60 days after the distribution.
  5. The amount you rolled over is generally taxed when the new plan makes a distribution.
  6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.
  7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.
  8. 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.
  9. There are several exceptions to avoid the additional 10% penalty on early withdrawals, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled (check out IRS Publication 590 for more exceptions).
  10. More information about early distributions from retirement plans and the additional 10% tax can be found in IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs).

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