Tapping Into Your Retirement Fund Early Could Cost You

29-Feb-2012

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Mr. Gao co-found and became the CFO at Oxstones Capital Management. Mr. Gao currently serves as a director of Livedeal (Nasdaq: LIVE) and has served as a member of the Audit Committee of Livedeal since January 2012. Prior to establishing Oxstones Capital Management, from June 2008 until July 2010, Mr. Gao was a product owner at Procter and Gamble for its consolidation system and was responsible for the Procter and Gamble’s financial report consolidation process. From May 2007 to May 2008, Mr. Gao was a financial analyst at the Internal Revenue Service’s CFO division. Mr. Gao has a dual major Bachelor of Science degree in Computer Science and Economics from University of Maryland, and an M.B.A. specializing in finance and accounting from Georgetown University’s McDonough School of Business.







Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that that transaction may mean a tax impact when they file their return.

Here are 10 facts from the IRS about the tax implications of an early distribution from your retirement plan.

  • Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
  • Early distributions are usually subject to an additional 10 percent tax.
  • Early distributions must also be reported to the IRS.
  • Distributions you roll over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
  • The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
  • If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
  • If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
  • If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
  • There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled.
  • For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
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