Retirement Plan Early Withdrawals: Make Sure You Meet The Requirements To Avoid A Penalty
Most retirement plan distributions are subject to income tax and may be subject to an additional penalty if you take an early withdrawal. What’s considered early? In general, it’s when participants take money out of a traditional IRA or other qualified retirement plan before age 59½. Such distributions are generally taxable and may be subject to a 10% penalty tax.
Note: The additional penalty tax is 25% if you take a distribution from a SIMPLE IRA in the first two years you participate in the SIMPLE IRA plan.
Fortunately, there are several ways that the penalty tax (but not the regular income tax) can be avoided. However, the rules are complex. As the taxpayer in one new court case found, if you don’t meet the requirements, you’ll be forced to pay the penalty.
Basic rules
Some exceptions to the 10% early withdrawal penalty tax are only available to taxpayers who take early distributions from traditional IRAs, while others can only be used with qualified retirement plans such as 401(k)s.
Some examples of exceptions include:
- Paying for medical costs that exceed 7.5% of your adjusted gross income,
- Taking annuity-like annual withdrawals under IRS guidelines,
- Withdrawing money from an […]