You are fortunate to have an IRA or a retirement plan. You learn that you can take early distributions. Oh, how tempting – you could do that remodel that you have been dreaming of, you could go on the exotic vacation, you could buy a new car and pay cash. The possibilities are endless. BUT, before you do, you need to keep a few key things in mind:
- An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old. Taking an early withdrawal will result in an IRS charge of 10 percent penalty on the amount from most qualified retirement plans. There are some exceptions to this rule. So, do your homework.
- Your plan may provide for nontaxable withdrawals and the additional tax may not apply. These include withdrawals of contributions that taxpayers paid tax on before they put them into the retirement plan.
- You decide to move your account from one financial institution to another. This is called a rollover as long as the funds are deposited into the new account within 60 days of withdrawal from the old account. You may experience a rollover when the plan administrator is directed to make the payment directly to another retirement plan or to an IRA.
- If you have taken an early withdrawal, you may have to file Form 5329 with your federal tax return for the year of the withdrawal.
- If you have questions, consult your plan administrator or your tax preparer for further guidance.