Key Points to Know about Early Retirement Distributions

Larry Villano, Publisher of Loopholelewy.com

  1. Early Withdrawals: An early withdrawal normally means taking the money out of your retirement plan before you reach age 59½.
  2. Additional Tax: If you took an early withdrawal from a plan last year, you must report it on your tax return. In addition, you may have to pa an early withdrawal penalty of 10 percent tax, which is added to your regular income tax liability..
  3. Nontaxable Withdrawals: The 10 percent penalty does not apply to nontaxable withdrawals, which includes contributions that you paid tax on before you put such contributions into the plan. For example, rollovers are a type of nontaxable withdrawal. A rollover occurs when you take cash or other assets from one plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it tax-free.
  4. Exceptions to 10% Penalty: There are many exceptions to the additional 10 percent penalty tax. Some of the rules for retirement plans are different from the rules for IRAs.
  5. File Form 5329: If you made an early withdrawal last year, you may need to file a form with your federal tax return. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, for details.