Taking money out early from your retirement plan may trigger an additional tax. Following are seven things from the IRS that you should know about early withdrawals from retirement plans:
1. An early withdrawal normally means taking money from your plan before you reach age 59½.
2. If you made a withdrawal from a plan last year, you must report the amount you withdrew to the IRS. You may have to pay income tax as well as an additional 10 percent tax on the amount you withdrew.
3. The additional 10 percent tax does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
4. A rollover is a type of nontaxable withdrawal and is generally a distribution of cash or other assets from one retirement plan that you contribute to another retirement plan. You usually have 60 days to complete a rollover to make it tax-free.
5. There are many exceptions to the additional 10 percent tax. Some of the exceptions for retirement plans are different from the rules for IRAs.
6. If you make an early withdrawal, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return.
7. The rules for retirement plans can be complex. The fast, safe and free way to prepare and e-file your tax return is to use IRS Free File. Free File offers brand-name software or online fillable forms for free. Free File software will pick the right tax forms, do the math and help you get the tax benefits you are due.
No matter how you prepare your taxes, you should always file electronically with IRS e-file. More than 80 percent of taxpayers e-file for faster refunds or for easier electronic payment options.
More information on this topic is available on IRS.gov.