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.
What do you think about this article? Do you agree or disagree with it? Be the first to comment on this article, and share your thoughts with the world. No registration is required to post comments.
What You Should Know About 457 Retirement Plans George Adams The 457 retirement plan was established for benefit of local and state government employees. The plan also can apply to employees of tax-exempt...
Retirement experts are encouraging people more and more to start saving and planning for retirement early. Buying Mexico real estate will ensure you enjoy retirement in a warm climate where the cost of...
Planning early for your retirement is one of the best things that you are ever going to be able to do for yourself in your lifetime. The earlier you start planning for your retirement the more educated you are
What is a 401(k) Plan? Daniel Beckett Retirement plans in the US include the popular 401(k) plan. The plan is an income tax deferred retirement fund that is funded by employees wages that go straight to the...
Most people approach retirement with a gloomy countenance. They approach retirement as if it is a surrender to the hands of fate and the debilitation of the body. Therefore, it is very important to help the...
With programs like social security failing it is now more important than ever to start saving up for retirement. Two ways to do this would be to invest into a 401k and an IRA. Each of these plans offers a...
Preparing for retirement is a smart move and preparing it early in life is better than later. Saving money for retirement is one of the key to having enough money in old age. In order to save money, you should
Many seniors that are reaching retirement age often make the decision to live in a retirement community. They often find the retirement community setting more appealing than a single family home for a...
Find The Best Retirement resorts Miriam Nolde The best way for you to choose the best retirement states in the country would be to list down all of your retirement needs. For example, special health care...
If your retirement dream includes living in a warm climate on the beachfront, in a place where the cost of living is low, Cancun real estate could be part of the solution to obtain the retirement you want, and
Tax Auditing firms may have a bit of trouble when searching for leads. Their competition between other firms within the same industry has been found to become very fierce. As such, it may be a very good...
For one reason or another, many people end up with either late tax return filing issues or unfiled tax returns. If you are late filing your tax return, it is VERY important to go ahead and file. Not filing tax
Don't forget to claim your IRS Mileage Rate tax deduction. Another great advantage to itemizing your tax return is the IRS mileage rate deduction you can receive from claiming your vehicle mileage. There are
For tax planning, the only certainty is uncertainty. Below are the current updates to the 2010-2011 Tax season that effective for 2010. At this time there is uncertainty as to what other tax law changes...
The IRS has released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will used during 2011
If your deductible loss from operating your farm is more than your other income for the year, you may have a net operating loss (NOL). You may also have an NOL if you had a personal or business-related...
Following last week's tax law changes, the Internal Revenue Service announced today the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions...
The Advocate's continuing concern that IRS collection practices inflict unnecessary harm on financially struggling taxpayers and fail to achieve the IRS's overriding objective of increasing long-term voluntary
In 1999, I decided to live a year in the city of Chita, Russia. For those not in the know, Chita is a city in Siberia.HistoryThe City of Chita is a the administrative center of the Chita Oblast, which is...
After deciding to move to Siberia for a year to teach at the Chita State Technical University, I embarked on a travel odyssey unlike any other. In this entry, we pick up the trip leaving the train station...
After deciding to move to Siberia for a year to teach at the Chita State Technical University, I embarked on a travel odyssey unlike any other. In this entry, we pick up the trip on the Trans-Siberian...
After deciding to move to Siberia for a year to teach at the Chita State Technical University, I embarked on a travel odyssey unlike any other. In this entry, we pick up the last stage of the seven-day trip to
Isla Mujeres in Mexico is a great way to escape the tourist crush in Cancun. Roughly 9 miles offshore, the island contains the Mexican beach culture of a bygone era. Oh, and the name translates to "The...
The Riviera Maya on the Caribbean coast was a secret getaway to paradise for many years. No longer. Now it is considered one of the finest beach areas in the world.Riviera MayaLocated on the Yucatan...
A sleepy island area in the 1970s, Cancun has been transformed into a mega tourist destination. Located on the Caribbean side of Mexico, this resort area has something for everyone.CancunMake no mistake...
Legal issues and problems are stressful, complex and inevitable. If you get wrapped up in legal issues, it sometimes helps to understand the lingo being bandied about.Legal TermsContract: An agreement...
Business entities comes in so many types that business owners can easily get confused. Here's a quick guide that will hopefully shed a little light on business entities for you.Business Entities"C"...
Article: Early Distributions From Retirement Plans Author: Richard Chapo Publication Date: 2007-07-01 Total Views: 307 Word Count: 472 Category:Home /
Finance / Taxes
Categories
