Avoid one of the top tax surprises on your income tax return. As always before making a major financial decision you should have a conversation with your CPA/Tax Preparer. We want to avoid any unpleasant surprises when you file your income tax returns. Here are some facts from the IRS regarding one of the most frequent and unpleasant surprises taxpayers often encounter - early distributions from retirement accounts:
Early Distribution from Retirement Plans May Have a Tax Impact
IRS Tax Tip 2012-34, February 21, 2012
Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that that transaction may mean a tax impact when they file their return.
Here are 10 facts from the IRS about the tax implications of an early distribution from your retirement plan.
1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
2. Early distributions are usually subject to an additional 10 percent tax.
3. Early distributions must also be reported to the IRS.
4. Distributions you roll over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
6. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
7. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
9. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled.
10. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Publication 575, Pensions and Annuities (PDF 227K)
Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts (PDF 72K)
Why pay not only income taxes but also a penalty in addition on early distributions from your retirement accounts when you may have other less costly options? If you are considering this or other financial moves contact me first to discuss your situation. You can use my contact information below to schedule an appointment.
Jeff Haywood, CPA
This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.
I prepare the following types of tax returns:
Federal and State Returns
I especially enjoy discussions about you, your business, your dreams and goals.
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In addition here are links to a few of my articles about income taxes for expatriates:
Income Tax Returns for Expatriates
US Income Tax Help for Expatriates
Foreign Earned Income Exclusion
Are You Required to Report Foreign Bank and Financial Accounts?
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For a full list of prior posts see the CPA Tax Blog.
As always keep in mind that the content provided on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.
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