7 things to know before you take early withdrawals from your retirement plan

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When you need money for an emergency, education, paying off debt, or any other purpose, it's tempting to look at your retirement accounts and consider taking a withdrawal before you reach retirement age.

The tax consequences of doing so can be costly, however. Before you take early withdrawals from your Individual Retirement Arrangement (traditional IRA or Roth IRA), 401(k) plan, or other retirement account, read these tips:

  1. An early withdrawal is generally a distribution you take before you reach age 59 ½.
  2. You may be subject to a 10% tax penalty for early withdrawal, in addition to any federal and state income tax on the withdrawal.

    The IRS charges a 10% penalty on withdrawals from qualified retirement plans before you reach age 59 ½, with certain exceptions. After you pay the penalty and the regular income tax, you may not have as much left as you had hoped.

  3. You can generally take a distribution from your retirement account, without penalty, as long as you reinvest it in another similar retirement account within 60 days.

    A distribution of eligible retirement plan assets that you reinvest within 60 days is considered a rollover. You can only make one tax-free rollover from a distributing account within the one-year period beginning when you receive the distribution. A trustee-to-trustee transfer from one trustee directly to another is not a rollover and is not affected by the one year waiting period requirement.

  4. For a qualified retirement plan, you may be able to take early withdrawal without penalty for these types of distributions:
    • Distributions after leaving service or after reaching age 55 (age 50 if you are a qualified public safety employee)
    • Distributions as part of series of payments over life expectancy, such as an annuity
    • Distributions made due to total and permanent disability
    • Distributions made due to death of employee or account holder
    • Distributions made to the extent your unreimbursed medical expenses exceed 10% of your adjusted gross income (7.5% if you or your spouse are age 65 or older)
    • Distributions made to an alternate payee under a qualified domestic relations order (QDRO)
    • Distributions due to an IRS levy on this plan under Section 6331
    • Distributions to a reservist serving on active duty 180 days or longer
    • Distributions of dividends from an employee stock ownership plan
  5. For early withdrawals from a traditional IRA, you may be able to take early withdrawal without penalty for these types of distributions:
    • Distributions as part of series of payments over life expectancy, such as an annuity
    • Distributions made due to total and permanent disability
    • Distributions made to you as the beneficiary of a deceased IRA owner
    • Distributions made to extent unreimbursed medical expenses exceed 10% of adjusted gross income (7.5% if you or your spouse are age 65 or older)
    • Distributions to pay for health insurance premiums for qualified individuals when you are unemployed
    • Distributions to pay for higher education expenses
    • Distributions for first-time home purchases
    • Distributions due to an IRS levy on this plan
    • Distributions to a reservist serving on active duty 180 days or longer
  6. If you have a Roth IRA, you can also take withdrawals up to the amount you originally contributed without penalty.

    Withdrawals from a Roth IRA are considered to come first from contributions and then from earnings. You do not pay income tax or penalty until your total withdrawals exceed your total contributions. (Certain exceptions may apply if you rolled over amounts from a traditional retirement plan to your Roth IRA.)

  7. You should receive Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance, Contracts, etc. from the plan administrator if you take a distribution.

    If the payer knows you qualify for an exception to the early distribution penalty, you should see a numeric code for the exception in Box 7 of Form 1099-R.

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Upcoming Tax Dates

January 1 — Everyone
Federal Holiday (New Year's Day) Details

January 10 — Employees who work for tips
If you received $20 or more in tips during December, report them to your employer Details

January 15 — Individuals
Make a payment of your estimated tax for 2018 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES Details

January 15 — Social security, Medicare, and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in December 2018

January 15 — Farmers & fishermen
Pay your estimated tax for 2018 using Form 1040-ES Details

January 21 — Everyone
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January 31 — All Employers
Give your employees their copies of Form W2 for 2018. If an employee agreed to receive Form W2 electronically, have it posted on a website and notify the employee of the posting.

January 31 — Individuals who must make estimated tax payments
If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040) for 2017 by January 31. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by January 31, file and pay your tax by April 15.

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If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W2G.

January 31 — Social Security, Medicare, and withheld income tax
File Form 941 for the fourth quarter of 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter timely, properly, and in full, you have until 02-10 to file the return.

January 31 — Certain small employers
File Form 944 to report social security and Medicare taxes and withheld income tax for 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2018 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

January 31 — Farm employers
File Form 943 to report social security and Medicare taxes and withheld income tax for 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

January 31 — Federal unemployment tax
File Form 940 for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

January 31 — All businesses
Give annual information statements to recipients of certain payments you made during 2018 Details

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