Due to the state of the economy, many taxpayers may have taken early distributions from retirement plans last year. In most cases, there is a negative tax impact that arises from these early distributions. Because of this, the IRS has released some facts about early distributions. Here are some of the highlights:
- Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
- Early distributions are usually subject to an additional 10 percent tax.
- Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
- The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
- If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
- If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
- If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
- There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.
For more information about early distributions from retirement plans IRS Publication 575 and Publication 590.
For more information on taxes click here.
Enter your email address to receive updates from KNS Financial:
Or, to subscribe to our RSS Feed click here.