Making withdrawals from retirement plans
before retirement is discouraged. If you withdraw from your retirement plan
such as a 401(k), you are charged additional tax on the withdrawal. Before
making a withdrawal from a retirement plan, consider the following:
1. A withdrawal is considered early if you
have not reached age 59½ and are making a withdrawal from your retirement
account.
2. Along with paying an additional 10%
income tax (because the IRS considers early withdrawals to be income), you also
must report the amount you withdrew to the IRS. You may need to file Form 5329,
Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored
Accounts, with your tax return.
3. The additional 10% tax does not apply to
non-taxable withdrawals that 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. If you are making a rollover, you
usually have 60 days to complete a rollover to make it tax-free. Generally, a
rollover is a distribution to you of cash or other assets from one retirement
plan that you contribute to another retirement plan.
There are exceptions where penalty for
early withdrawal is not charged. If when you retire, leave or are laid off from
service and you are 55 years or older, then you get an exemption from the 10%
penalty tax on the early withdrawal. To avoid penalty on an IRA account,
different rules apply.
In some cases, it is preferable not to
withdraw funds from retirement plans and use other options such as taking a
loan when faced with a financial crunch. Apart from having to pay additional
taxes, early withdrawals also affect your future financial security.