We all know how important it is to save for retirement, but exactly how do withdrawals from our retirement accounts affect our tax situation? When times are tough, your first instinct may be to take funds out of your retirement account, but depending on your situation you may be subject to a penalty.
The funds you withdraw from a traditional IRA or other qualified retirement plan before age 59½ are called "early" distributions. These distributions can be subject to a 10 percent early withdrawal penalty in addition to the income tax on the amount withdrawn.
Following are some exceptions to the 10 percent early withdrawal penalty:
- You received a distribution from a retirement plan (other than an IRA) after leaving a job and are age 55.
- You have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income.
- The distributions are not more than the cost of your medical insurance (IRA only).
- You are disabled.
- You are a beneficiary of a deceased plan participant or IRA owner.
- You are receiving distributions in the form of an annuity.
- The distributions are not more than your qualified higher education expenses (IRA only).
- You use the distributions to buy, build or rebuild a first home (IRA only, and limited to $10,000).
- The distribution is due to an IRS levy.
Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax; however, you must complete the rollover within 60 days after the day you received the distribution. The amount you rollover is generally taxed when the new plan makes a distribution to you or the beneficiary.
There are many caveats when it comes to retirement plans; therefore, contacting your tax or investment advisor would be a wise decision. Early distributions must be reported to the IRS. Your distribution should be reported on Form 1099-R. If you choose to make a withdrawal from your retirement plan, be sure you contact us for tax planning purposes.
Be sure to discuss any retirement savings changes and/or withdrawals with us during your upcoming tax planning meeting.