6 Facts about Early Withdrawals from Retirement Plans

It’s possible that you will find it necessary to take out money early from your IRA, 401(k), or other retirement plan. This might create an extra tax on top of your income tax.

Here are some facts to remember if you're considering taking an early distribution:

1. Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
2. 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 may have to pay an additional 10% tax.
3. Nontaxable Withdrawals. The additional 10% 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.
4. Check Exceptions. There are many exceptions to the additional 10% tax. Some of the rules for retirement plans are different from the rules for IRAs.
5. File 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.
6. It’s Complicated. Early withdrawal rules can be complex. Make sure you use a qualified tax professional or some other reliable way to complete and submit your taxes after you’ve made an early withdrawal.