Finance Related

Any distributions you take from your 401(k), IRA, or other retirement account should be included with your taxable income. And they might have an additional 10% tax put on them if you take the distribution before the you are 59 1/2 years of age.

Early Distributions from your Retirement Account cost you 10% Penalty

Withdrawing money from your qualified retirement account might subject you to an additional 10% tax on the money. They consider this a penalty if you take the early distribution from the 401(k), IRA, 403(b) and other qualified accounts prior to the age of 59.5. Like anything, exceptions are there. One little known fact to know is that this penalty might apply to your Roth IRA, even though it might be more than five (5) years since it was first opened. If you have a Roth IRA it is crucial for you to review the exceptions for the 10 percent penalty, or your Roth distribution could end up being a subject to both taxes and the 10 percent penalty.

Here is some information you’ll want to know regarding an early distribution and tax consequences.

You additional tax would be 10% of your taxable amount on the early distributions. This taxable amount will also be included with your taxable income. The 10% penalty tax is added on top of the regular income tax. Known or called an early withdrawal tax penalty, it is like the penalty the banks will charge you if you liquidate your savings accounts early. If you can meet certain criteria you can absolutely avoid this tax penalty. However, it is not possible to avoid your retirement withdrawal in your taxable income. If you are considering tapping your retirement account due to short-term financial issues you need to take into consideration the tax impact it will have on you.

Withdrawing money from your SIMPLE IRA that you started participation in within the past 2 years, your early distribution penalty goes up to 25% in lieu of the 10%.

Early Distribution Penalty Reporting

This additional tax goes directly on the 1040 Form or the 5329 Form (pdf), this depends on your tax situation. You can refer to Instructions for Form 5329 (pdf) for details. But you can calculate this additional tax penalty right on the 5329 Form if your circumstances meet one (1) of the listed exceptions and the retirement plan didn’t report this exception on 1099-R Form, in box 7.

Early Distribution Penalty Exceptions

You can avoid paying the 10% penalty tax on the early retirement distributions if you qualify for some exceptions. Two sets of exception apply: The first set apply to those individual accounts (both Roth and traditional IRAs). And the second set applies to the 401(k) and the 403(b) plans.

It doesn’t matter what age you have right now – www.freeinvestmentblog.com is a good thing to think about at any age. For the general tips about investment, also about retirement investment fund in particular – please visit thisblog.

And if you want to get stock market news, visit this blog.

Related Blogs

• youngandthrifty Dividend and Distributions per Annum | youngandthrifty.ca
• Your retirement account might get smaller this year | idebt
• Three Big Mistakes Employees Make With Retirement Accounts | Finance
• Will I have a tax penalty for selling my house before 2 years? | Sell My House Quickly
• Donation and IRS exempt? | Non Profit