Needing some extra money for summer vacation? Are you thinking about taking funds out of your Retirement Account to help pay off your bills? You may need some of the funds in your retirement account to purchase a home or vehicle or to help pay off medical bills that have piled up. Whatever the reason for taking funds out of your retirement account, the last thing you may be thinking of are the tax consequences of taking those funds out early. A withdrawal is considered early typically if you withdraw money before you turn 59 and a half.
When you take the funds out of an IRA or a 401K account, you will likely be given the option to withhold taxes from this. The reason for this is that it will be included in your taxable income at the end of the year. You could think of it as getting a bonus from your employer; you are receiving more income and so, you will need to pay more taxes. It is important to withhold taxes at this point because if you choose not to, you will likely end up owing when you file your return in April. You may have to pay an additional 10% tax on the early withdrawal. Once you take those funds out and, hopefully, have taxes withheld, you will receive a 1099 from the financial institution that your retirement account is through. This is something you’ll need to save so that you can prepare an accurate return at the end of the year.
In addition to the distribution being taxable as income, your distribution may also be subject to an early withdrawal penalty if you are taking this distribution prior to turning 59 ½ years old. This penalty is imposed by the IRS and is 10% of your entire distribution. The good news is there are exceptions to this rule! For instance, you can get penalty free IRA distributions to pay for college, including tuition, room and board, fees, books, and supplies. However, this will reduce your eligibility for financial aid. Another exception is if you are no longer able to work due to severe physical or mental disability, and a physician signs off on it.
If you are thinking of withdrawing early from your retirement and need help making sure you pay your taxes correctly, Polston Tax can help. Our team of tax accountants and preparers can help you file your tax return correctly and pay off the correct amount. Call today at 844-841-9857 or click below to schedule a free consultation.