401 k

10 Facts About Early Distributions You Must Know

Amid the tough economy, lots of people tapped into their 401(k) retirement plans or Individual Retirement Accounts (IRAs) as a way to get cash to pay the bills.

That money probably gave you a short-term cushion, but it also has long-term tax consequences, particularly for those who were under the age of 59 ½ at the time of their withdrawal.

In such cases, cashing out of a retirement plan (either partially or wholly) is considered an early distribution. It also means that your cash withdrawal is subject to a host of IRS tax rules.

If you took an early withdrawal last year by tapping your retirement fund, the IRS wants you to know these 10 facts about early distributions.

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 rollover 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, for certain medical or educational expenses, or if you are 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 IRS Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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