Early Distributions From Retirement Plans

Early Distributions From Retirement Plans



Early Distributions From Retirement Plans
An early distribution from an​ Individual Retirement Arrangement (IRA) or​ a​ qualified retirement plan need not be a​ taxing experience .​
Fortunately, there are exceptions to​ early distributions.
Any payment that you receive from your IRA or​ qualified retirement plan before you reach age 59½ is​ normally called an​ early or​ premature distribution .​
As such, these funds are subject to​ an​ additional 10 percent tax .​
But there are a​ number of​ exceptions to​ the age 59½ rule that you should investigate if​ you make such a​ withdrawal .​
Some of​ these exceptions apply only to​ IRAs, some only to​ qualified retirement plans, and some to​ both .​
IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.
In addition to​ the 10 percent tax on early distributions, you will add to​ your regular taxable income any distributions attributable to​ elective deferrals that you contributed from your pay, your employer’s contribution and any income earned on all contributions to​ the account .​
If you made any nondeductible contributions, their portion of​ the distribution is​ not taxed, since you’ve already paid tax on this amount.
There is​ a​ way to​ avoid paying any tax on early distributions, however .​
It is​ called a​ rollover .​
Generally, a​ rollover is​ a​ tax-free transfer of​ cash or​ other assets from an​ IRA or​ qualified retirement plan to​ an​ eligible retirement plan .​
An eligible retirement plan is​ a​ traditional IRA, a​ qualified retirement plan, or​ a​ qualified annuity plan .​
You must complete the rollover within 60 days of​ when you received the distribution .​
The amount you roll over is​ generally taxed when the new plan pays you or​ your beneficiary.
If the early distribution from an​ employer’s plan is​ paid directly to​ you, your plan administrator will normally withhold income tax at​ a​ 20 percent rate .​
If you roll over the distribution to​ a​ new plan, you must replace that 20 percent of​ the funds that were withheld and deposit that amount in​ the new plan or​ you will owe taxes on that amount .​
To avoid the inconvenience of​ this withholding, you can have your old plan’s administrator transfer the rollover amount directly to​ the new plan or​ a​ traditional IRA.
All early distributions must be reported to​ the IRS .​
You will report tax-free rollovers on lines 15a and 16a of​ Form 1040 along with any taxable distributions, but you will enter on line 15b or​ 16b only the taxable amounts you don’t roll over.
Early distributions from retirement plans can involve complex tax issues .​
Make sure you understand the issues or​ get competent tax advice.




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