Here’s what people should know about taking early withdrawals from retirement plans

Taxpayers may need to take money out of their individual retirement account or retirement plan early. However, this can trigger an additional tax on top of other income tax they may owe. Here are a few key things for taxpayers to know:

• Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
  
  

• Additional Tax. The IRS charges a 10 percent penalty on early withdrawals from most qualified retirement plans. There are some exceptions to this rule.

 

• Nontaxable Withdrawals. The additional tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the retirement plan.

 

• Rollovers are a nontaxable withdrawal. A rollover happens when taxpayers take cash or other assets from one retirement plan and put the money in another plan within 60 days. A rollover can also happen when they direct their plan administrator to make the payment directly to another retirement plan or to an IRA.

 

• Form 5329. Taxpayers who took an early withdrawal last year may have to file Form 5329 with their federal tax return. 

 

• Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file a tax return. The tax software will pick the right tax forms, do the math, and help find tax benefits.

 
"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
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Monarch Accounting Group, Inc
145 Tower Drive, Suite 4
Burr Ridge, IL 60527
Phone (630) 320-3720