Droves of people have been paying penalties on early withdrawals from Retirement Plans due to the down turn of the economy. In most cases Unemployment hasn't been enough to sustain the household, and pulling money from the Retirement Account was the only option.
Unfortunately this procedure has left many taxpayer's Retirement accounts low. Individuals who are close to retirement are wondering about the quality of their retirement. Others are considering working until 70, and still others are taking what's left in their Retirement accounts and moving offshore, where they can retire and live well, on a lower monthly income.
Regardless of how you plan to handle the situation, we all still have to pay Uncle Sam when you take money from your Retirement account before you are a certain age. Below are the tax laws pertaining to early withdrawals from your Retirement Plans:
Tax Rules on Early Withdrawals from Retirement Plans
1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.
2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.
3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.
5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.
