Some people take an early withdrawl from their IRA or retirement plan. Doing so in many cases triggers an added tax on top of the income tax you may have to pay. Here are some key points you should know about taking an early distribution.
- Early Withdrawls.An early withdrawl normally means taking the money out of your retirement plan before you reach age 59 1/2.
- Additional Tax. If you took an early withdrawl from a plan last year, you must report it to the IRS. You may have to pay income tax on the amount you took out. If it was an early withdrawl, you may have to pay an added 10 percent tax.
- Nontaxable Withdrawls. The added 10 percent tax does not apply to nontaxable withdrawls. They include withdrawls of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
A rollover is a type of nontaxable withdrawl. A rollover occurs when you take cash or other assets from one plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it tax-free.
- Check Exceptions. There are many exceptions to the additional 10 percent tax. Some of the rule for retirement plans are different from the rules for IRAs.
- File Form 5329. If you made an early withdrawl last year, you may need to file a form with your federal tax return.
- IRS e-file. Early withdrawl rules can be complex.Contact Abbott Business Services for more information.