5 Tax Rules for Taking an Early Withdrawal from a Retirement Account
Money Girl outlines the 5 tax rules you must know before taking an early withdrawal from your retirement account.
Laura Adams, MBA
Q. I still have a retirement account with an old employer. Can I roll over some of it into a traditional IRA and withdraw the rest to pay down debt? If so, how would this affect my taxes?
Answer. Any time you withdraw funds from a traditional retirement account—like a 401(k), 403(b), or a traditional IRA—there are tax consequences.
Here are 5 retirement tax rules you should know:
Rule #1
Withdrawals from a traditional retirement account are taxed as ordinary income, not capital gains.
Rule #2
If you’re younger than age 59½, taking money out of a traditional retirement plan is generally considered an early withdrawal and is subject to an additional 10% tax penalty.
Rule #3
The 10% early withdrawal penalty doesn’t apply to withdrawals of contributions that were taxed before you put them in a retirement account.
Rule #4
If you roll over funds from one qualified retirement plan to another within 60 days, the transfer is not subject to income tax or an early withdrawal penalty.
Rule #5
There are some exceptions to the 10% early withdrawal penalty, including using retirement funds for certain medical expenses. The exceptions are different depending on whether you withdraw from a workplace plan or an IRA.
For more information about taking early distributions from retirement plans, see IRS Publication 575, Pension and Annuity Incomeopens PDF file .
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.