Somewhere between the time we start our work careers and the time we finally retire, life happens. During that time span, many taxpayers feel the need to dip into their Individual Retirement Account (IRA) or their retirement plan in order to pay expenses.
But the IRS wants to remind you that making early withdrawals from those types of plan can trigger an extra tax on early withdrawals, effectively placing another tax on top of what the taxpayer owes otherwise.
So the IRS offers these helpful hints for taxpayers considering making an early withdrawal from either an IRA or some other retirement plan:
- Early withdrawals. An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.
- Additional tax. Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.
- Nontaxable withdrawals. The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.
- Rollover. A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. They normally have 60 days to complete a rollover to make it tax-free.
- Exceptions. There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
- Disaster Relief. Participants in certain disaster areas may have relief from the 10-percent early withdrawal tax on early withdrawals from their retirement accounts.
- File Form 5329. Taxpayers who took early withdrawals last year may have to file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax returns.
And Another Thing…
The IRS reminds taxpayers who turned age 70½ during 2017 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Sunday, April 1, 2018.
The April 1 deadline applies to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs; however, they do not apply to ROTH IRAs.