Saving for your retirement is one of the most important things you can do. You can save for retirement by having the money come straight out of your paycheck or by depositing the money yourself. Some companies do offer retirement contribution matching which will help you save even more for your retirement. While all your savings are meant to wait until you have actually retired, sometimes people find themselves needing to take money out of their retirement account early for a number of reasons. While it may seem like a quick way to get cash, withdrawing early from your retirement account can have some serious consequences.
An early withdrawal from a retirement account is usually when a taxpayer takes cash out of their account before they are 59½ years old. If you withdraw early, the IRS charges a 10% penalty on all early withdrawals from qualified retirement plans. There are some exceptions to this rule. For instance, if you take distributions from a 401(k) plan and then roll it into another eligible retirement plan within 60 days, you do not have to pay the penalty. Disabled taxpayers can take distributions from both 401(k) plans without having to deal with the early withdrawal penalty. The IRS does require proof of your disability to be able to get the penalty exemption, so make sure you have the paperwork ready. Distributions from a retirement account that are used to pay for medical expenses that exceed 10% of your AGI are also not subjected to early withdrawal penalty. You can learn more about the exemptions here. Keep in mind, the additional tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that you have already paid the tax on before they were put into your retirement account.
If you are looking at withdrawing early, make sure to speak to a professional about the consequences and see if there is another way to get the money you need. If you decide to withdraw, you will need to file Form 5329 with your federal tax return. If you are needing help with your taxes or figuring out how to file your tax return, give Polston Tax a call. Our team of tax attorneys and tax accountants can help you decide what is best for you! Call us at 844-841-9857 or click below to schedule a free consultation!