MU Extension MU Extension       University of Missouri    ●    Columbia    ●    Kansas City       Missouri S&T     ●    St. Louis

MissouriFamilies.org - Money Matters - Consumer Action

 

Feature Articles: Taxes

 

Early distributions from retirement plans

Reviewed and used with special permission from the IRS by: Brenda Procter, M.S., State Specialist & Instructor, Personal Financial Planning, University of Missouri Extension


An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a “taxing” experience, according to the IRS.
 

Any payment that you receive from your IRA or qualified retirement plan before you reach age 59 is normally called an early or premature distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59 rule that you should investigate if you make such a withdrawal. Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs) have the details.
 

In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to “elective deferrals” that you contributed from your pay, your employer's contribution and any income earned on all contributions to the account. If you made any nondeductible contributions, that portion of the distribution is not taxed, since you've already paid tax on this amount.
 

There is a way to avoid paying any tax on early distributions, however. It is called a rollover. Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to an eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days of when you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.
 

If the early distribution from an employer's plan is paid directly to you, your plan administrator will normally withhold income tax at a 20 percent rate. If you roll over the distribution to a new plan, you must replace that 20 percent of the funds that were withheld and deposit that amount in the new plan, or you will owe taxes on that amount. To avoid the inconvenience of this withholding, you can have your old plan's administrator transfer the rollover amount directly to the new plan or to a traditional IRA.
 

Early Distributions from SIMPLE IRAs

 

Two-year rule: To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which an employee first participated in his or her employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. The 2-year period begins on the first day on which contributions made by the employer are deposited in the employee’s SIMPLE IRA.

 

After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan).

 

Additional Tax on Early Distributions

 

The additional tax on early distributions (discussed above) applies to SIMPLE IRAs. If a distribution is an early distribution and occurs during the 2-year period following the date on which the employee first participated in his or her employer's SIMPLE IRA plan, the additional tax on early distributions is increased from 10% to 25%.

 

If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed.

 

You can download Publications 575 and 590, along with any related forms and instructions, through Forms and Publications on the IRS website at www.irs.gov. You can also order the forms by calling toll free: 1-800-TAX-FORM (1-800-829-3676).

 

Source: IRS. (2011). Retirement topics: Tax on early distributions. Retrieved from http://www.irs.gov/retirement/participant/article/0,,id=211440,00.html

 


University of Missouri logo links to http://extension.missouri.edu

Site Administrator:
mofamweb@missouri.edu
Copyright  ADA  Equal Opportunity


MissouriFamilies is produced by the College of Human Environmental Sciences,
Extension Division, University of Missouri


Last update: Wednesday, February 29, 2012