Briefcase Small Business Taxes Business Small Professional Taxes

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.