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Early Withdrawal From Retirement Plans

By Kurt Osterberg · On March 28, 2018

If you are retiring before the “normal” retirement age of 59½ or older, or if you find yourself in need of money, you may need to make an early withdrawal from your retirement plan. An early withdrawal from your retirement plan is not without consequences – there will be taxes for sure, and quite possibly (likely?) penalties (referred to as “additional tax on early withdrawals” below). For exceptions to the early withdrawal penalty for IRAs, see this article. Otherwise, for exceptions to the early withdrawal penalty for a 401k, see this article.

Recently the IRS published Tax Tip 2018-40, which details some items that you need to remember as you consider an early withdrawal from a retirement plan. The actual text of their Tip is below.

Things to Remember when Considering Early Withdrawal from Retirement Plans

Many taxpayers may need to take out money early from their Individual Retirement Account or retirement plan. Doing so, however, can trigger an additional tax on early withdrawals. They would owe this tax on top of other income tax they may have to pay. Here are a few key points to know:

Early withdrawals. An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.

Additional tax. Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.

Nontaxable withdrawals. The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.

Rollover. A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. They normally have 60 days to complete a rollover to make it tax-free.

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.

Disaster Relief. Participants in certain disaster areas may have relief from the 10-percent early withdrawal tax on early withdrawals from their retirement accounts.

File Form 5329. Taxpayers who took early withdrawals last year may have to file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax returns.