10 facts on early distributions from retirement plan

TOUGH times may necessitate dipping into your retirement funds before retirement. Look at the tax impact of such a move. You may be shocked to find out what you are left with – as little as half or two-thirds of what you withdraw. Here are ten facts about early distributions.

1. Payments you receive from your IRA (Individual Retirement Arrangement) before you reach age 59 1/2 are generally considered early or premature distributions.

2. Early distributions are reported to the IRS.

3. You have to pay regular federal and state income taxes on your gross distribution.

4. You also have to pay an additional 10 percent penalty for that early distribution.

5. Add your income taxes and penalties and you could end up with only half to two-thirds in net funds, depending on your tax brackets. Realizing this, you then have to increase your distribution – leading to more taxes and penalties.

6. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10% penalty. You must complete the rollover within 60 days after the day you received the distribution.

7. The amount you rollover is generally taxed when the new plan makes a distribution to you or your beneficiary.

8. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.

9. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.

10. 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.

Tip: There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.

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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals.  Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.

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