In today’s economy, some taxpayers may need to take money out of their retirement plans to make ends meet. If you have or are contemplating on taking a distribution, there are some very important and unexpected tax issues you need to be aware of.
- Withdrawals from tax-deferred retirement accounts, such as Traditional IRAs are generally taxable and will be added to your other income for the year and taxed at your highest marginal rate.
- 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. Be aware that all distributions for an account that contains both deductible and nondeductible contributions is distributed ratably based between the deductible and nondeductible balances in the account.
- 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.
- Taxable distributions that are received from your retirement plans before you reach age 59½ are generally considered early or premature distributions and subject to an additional 10 percent penalty tax.
- Distributions that are rolled over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. However, you must complete the rollover within 60 days after the day the distribution is received.
- There are several limited 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 unreimbursed medical or educational expenses, or if you are disabled. Call for additional information and limitations.
Taking money from your retirement plan can not only affect your current year taxes, it can have a profound impact on your future retirement nest egg. You are encouraged to carefully consider the overall impact before making a withdrawal. If you have questions or need assistance, please give this office a call.