Taking an early withdrawal from your Individual Retirement Account (IRA) may be tempting. But the tax penalty can make a significant dent in your long-term financial plan.
Here are some terms and requirements to keep in mind before considering an early withdrawal:
- Early withdrawals are defined as taking distributions from your IRA or retirement plans before the age of 59½.
- Taxpayers must report withdrawals to the IRS when they file their tax returns. They may owe income tax on withdrawals and pay an additional 10% tax penalty.
- Nontaxable withdrawals aren’t subject to the 10% tax penalty. Examples include contributions on which taxpayers paid taxes before the money was deposited into the plan.
- Rollovers happen when plan holders move money or other assets from 1 plan to another. The IRS allows a maximum of 60 days to complete a rollover to keep it tax-free.
- Certain exceptions exempt plan holders from the 10% tax penalty. Many retirement plan and IRA rules differ.
- Disaster Relief provisions exempt plan holders in certain disaster areas from the 10% tax penalty.
* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Tip adapted from IRS.gov