Here are some key points you should know about taking an early distribution:
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
to the IRS. You may have to pay income tax on the amount you took out.
If it was an early withdrawal, you may have to pay an added 10 percent
tax.
3.Nontaxable Withdrawals.
The added 10 percent tax does not apply to nontaxable withdrawals. They
include withdrawals of your cost to participate in the plan. Your cost
includes contributions that you paid tax on before you put them into the
plan.
A rollover
is 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.Check 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. See
IRS.gov for details about these rules.
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.
6.Use IRS e-file. Early withdrawal rules can be complex. IRS e-file
is easiest and most accurate way to file your tax return. The tax
software that you use to e-file will pick the right tax forms, do the
math and help you get the tax benefits you’re due. Don’t forget that
with IRS Free File, you can e-file for free. Free File is only available
through the IRS website at IRS.gov/freefile.
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