IRS Tax Tip  - Key Points to Know about Early Retirement Distributions
March 2, 2015  

Some people take an early withdrawal from their IRA or retirement plan. Doing so in many cases triggers an
added tax on top of the income tax you may have to pay. Here are some key points you should know about
taking an early distribution:

1.        Early Withdrawals.  An early withdrawal normally means taking the money out of your retirement plan
before you reach age 59½.

2.        Additional Tax.  If you took an early withdrawal from a plan last year, you must report it to the IRS. You
may have to pay income tax on the amount you took out. If it was an early withdrawal, you may have to pay an
added 10 percent tax.

3.        Nontaxable Withdrawals.  The added 10 percent tax does not apply to nontaxable withdrawals. They
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.

A rollover is a type of nontaxable withdrawal. A rollover occurs when you take cash or other assets from one
plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it
tax-free.

4.        Check 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. See IRS.gov for details about these rules.

5.        File Form 5329.  If you made an early withdrawal last year, you may need to file a form with your federal
tax return. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored
Accounts, for details.

6.        Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is easiest and most accurate way to file
your tax return. The tax software that you use to e-file will pick the right tax forms, do the math and help you
get the tax benefits you’re due. Don’t forget that with IRS Free File, you can e-file for free. Free File is only
available through the IRS website at IRS.gov/freefile.