Feature Articles: Taxes
Early Distributions from Retirement Plans
Reviewed and used with special permission from the IRS by: Brenda Procter, M.S., State Specialist & Instructor Personal Financial Planning, University of Missouri Extension
An early distribution from an Individual Retirement
Arrangement (IRA) or a qualified retirement plan need
not be a "taxing" experience, according to the IRS.
Any payment that you receive from your IRA or qualified retirement plan
before you reach age 591/2 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 591/2 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 to a
traditional IRA.
You may download Publications 575 and 590, along with any related forms
and instructions, through "Forms and Publications" on
the IRS Web site at
www.irs.gov. You may also call toll free
1-800-TAX-FORM (1-800-829-3676) to order them.
Source: IRS TAX TIP 2004-35
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Last update: Tuesday, May 05, 2009
