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The IRS Tells Us To Know the Rules Before Breaking Open Our Retirement Piggy Bank

[Stacie says: the IRS explains below some rules about penalties and withdrawals from your retirement account.]

If you are under age 59 ½ and plan to withdraw money from your retirement account, you will likely pay both income tax and a 10% early distribution tax on any previously untaxed money that you take out. Withdrawals from a SIMPLE IRA before you are age 59 ½ and during the “2-year period” may be subject to a 25% additional early distribution tax instead of 10%. The 2-year period is measured from the first day that contributions are deposited. So, consider the decrease in your retirement savings and the increase in tax before you withdraw from either your IRA or a retirement plan (for example, 401(k) or 403(b) plans).

There are some different exceptions to the 10% early distribution tax depending on whether you take money from an IRA or a retirement plan.

Exceptions for IRAs Include:
You use the amount withdrawn to pay:
medical insurance premiums while unemployed;
qualified higher education expenses; or
to buy, build or rebuild a first home.
An exception also applies if you receive distributions in the form of an annuity.
See Publication 590, Individual Retirement Arrangements (IRAs), for a complete list and details of the exceptions.

Exceptions for Retirement Plans Include:
you separate from service and are age 55 or older in that year; or
you elect to receive the money in substantially equal periodic payments after separation from service.

See Publication 575, Pension and Annuity Income, for a complete list and details of the exceptions. If you are required to pay the 10% early distribution tax, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, along with your tax return.


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