Tax Penalty For Early Retirement Fund Withdrawal

Tax Penalty For Early Retirement Fund Withdrawal

Early retirement fund withdrawal should be included as part of your taxable income for the year that it was withdrawn. The tax penalty for early retirement fund withdrawal is 10 percent of the withdrawn amount and this is applicable if the amount was withdrawn before the person reaches the age of 59.5 years. Also, the person would also have to pay 10 percent income tax on the taxable amount which is in addition to the regular income tax.

Tax penalty for early retirement fund withdrawal is applicable to any early distribution that is made from a qualified retirement plan like IRA, 401k or 403b. However, there are exceptions made to the 10 percent tax penalty.

What many people do not realize that the tax penalty is also levied against Roth IRAs even if it is five years since a person first opened the Roth account.

If you qualify for certain exceptions, it is quite possible that you will not have to pay the 10 percent tax penalty for early retirement fund withdrawal. Here are some of the exceptions and you need to qualify for any one.

Exceptions for Early Retirement Fund Withdrawal from an IRA:

  • The money is rolled over directly to a new retirement account.
  • You received lump sum amount but rolled over the amount to a qualified retirement plan within 60 days of receiving it.
  • You are permanently disabled.
  • You are unemployed but still paid your health insurance premiums.
  • You paid for college tuition for yourself or a dependent.
  • You bought a house and did not own one in the previous two years.
  • You paid medical expenses that exceed 7.5 percent of your adjusted gross income.

Exceptions for Early Retirement Fund Withdrawal from a Qualified Retirement Plan:

  • The early withdrawal was done because the plan participant died or suffered from a disability.
  • You were 55 years old or more when you retired or left your job.
  • You paid for medical expenses exceeding 7.5 percent your adjusted gross income.
  • You took early withdrawal as it was ordered by a divorce decree or separation agreement.
         Tax penalty for early retirement fund withdrawal is reported on Form 5329 if the person meets one of the above listed exceptions. Otherwise, it has to reported directly on Form 1040.

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