Many people find themselves in situations when they need to withdraw money from their retirement plan earlier than planned. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are five things taxpayers should know about early withdrawals from retirement plans:
1. Early Withdrawal.
An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59 1/2 years old.
2. Paying Additional Tax.
If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they might have to pay an additional 10 percent tax.
3. Nontaxable Withdrawals.
The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.
There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
5. Form 5329.
If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return.
Please call if you have any questions about early withdrawals or filing Form 5329.