The purpose of retirement plans such as the 401(k) and Individual Retirement Account (IRA) is to save money for your retirement years. As such, the IRS imposes a penalty of 10% for early withdrawals taken from qualified retirement plans before age 59 1/2. Qualified retirement plans include section 401(k) plans, individual retirement accounts (IRAs), and 401(k) plan, tax-sheltered annuity plans under section 403(b) for employees of public schools or tax-exempt organizations.
While you should always think carefully about taking money out of your retirement plan before you’ve reached retirement age, there may be times when you need access to those funds, whether it’s buying a new house or paying for out of pocket medical expenses. Fortunately, IRS provisions allow a number of exceptions that may be used to avoid the tax penalty.
Remember that although using the above techniques will help you avoid the 10% penalty tax, you are still liable for any regular income tax that’s owed on the funds that you’ve withdrawn. Distributions rolled over into another qualified retirement plan or distributions from a Roth IRA however, escape both the regular income tax and the 10% penalty tax. Rollovers should be made directly between your brokers, to avoid paying the 20% withholding required on distributions that you touch.
Thinking about tapping your retirement money early? Give us a call. We’ll help you figure out whether you can avoid penalties on your early withdrawals–or not.
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Copyright All rights Reserved. Financial Dream Team, like all providers of personal financial services is required by law to inform their clients of their policies regarding privacy of client information. The information in this material is not intended as tax or legal advice. Financial Dream Team, USA, LLC is a registered business in Califronia. Provided content is for informational purposes only.