Are you considering taking an early distribution from your retirement plan? If so, now is a good time to brush up on the early distribution rules. In Tax Tip 2011-42 (available here), the IRS reminds you of the tax impact of taking a withdrawal from your retirement plan before you reach age 59 ½.
Early distributions are usually subject to an additional 10% tax. You must report this 10% tax on the appropriate line of Form 1040 and may also be required to file Form 5329 “Additional Taxes on Qualified Plans (Including IRAs) and other Tax-Favored Accounts” (available here). Distributions from qualified retirement plans are subject to federal income tax withholding. However, depending on what tax bracket you fall in, your withholding may not be enough. In this case, you may have to make estimated tax payments.
Note that there are situations where you can take an early distribution without incurring the 10% tax. The 10% tax does not apply if you roll the distribution over to another IRA or other qualified retirement plan so long as you complete the rollover within 60 days of the date you received the distribution. The 10% tax also does not apply if you use the distribution for the purchase of a first home, to pay certain medical or education expenses, or if you are disabled.
While there are exceptions that allow you to take an early distribution without incurring the 10% tax, you may be better off letting your nest egg grow so you can ease into your golden years. As always, you should thoroughly examine your situation before deciding tap into your retirement savings. Additional information regarding early distributions can be found at:
- Tax on Early Distributions from Retirement Plans, Other Than IRAs: http://www.irs.gov/taxtopics/tc558.html
- Tax on Early Distributions from Traditional and Roth IRAs: http://www.irs.gov/taxtopics/tc557.html
- Pensions and Annuities: http://www.irs.gov/pub/irs-pdf/p575.pdf
- Individual Retirement Arrangements (IRAs): http://www.irs.gov/pub/irs-pdf/p590.pdf