Many taxpayers may need to take out money early from their Individual Retirement Account or retirement plan. Doing so, however, can trigger an additional tax on early withdrawals. They would owe this tax on top of other income tax they may have to pay. Here are a few key points to know:
- Early withdrawals. An early withdrawal is
taking a distribution from an IRA or retirement plan before reaching age
59½.
- Additional tax. Taxpayers who took
early withdrawals from an IRA or retirement plan must report them when
they file their tax return. They may owe income tax on the amount plus an
additional 10 percent tax if it was an early withdrawal.
- Nontaxable withdrawals. The additional 10
percent tax doesn’t apply to nontaxable withdrawals, such as contributions
that taxpayers paid tax on before they put them into the plan.
- Rollover. A rollover
happens when someone takes cash or other assets from one plan and puts it
in another plan. They normally have 60 days to complete a rollover to make
it tax-free.
- Exceptions. There are many exceptions
to the additional 10-percent tax. Some of the rules for retirement plans
are different from the rules for IRAs.
- Disaster Relief. Participants in certain
disaster areas may have relief
from the 10-percent early withdrawal tax on early withdrawals from their
retirement accounts.
- File Form 5329. Taxpayers who took
early withdrawals last year may have to file Form
5329, Additional Taxes on Qualified Plans (including IRAs) and
Other Tax-Favored Accounts, with their federal tax returns. Alliance Financial & Income Tax, a tax and financial services firm in Blue Springs Missouri can help.
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