IRS Penalties

The early distribution penalty is a key factor that can cost you considerably when you take money out of your savings accounts before you are supposed to do so. You may be thinking, "It's my money!" but the underlying reason that this tax code is in place is because of the need for paying taxes on those funds. Because you can put away money into your savings accounts for retirement without paying taxes on that money, you will need to pay those taxes if you do not wait until that retirement comes to pull the funds out. Unfortunately, this can be a very hefty fine that you need to pay.

There's More To Know

Early distribution penalties come into play when you take money out of your Traditional Individual Retirement Account (called more commonly an IRA) or from your other retirement products including the 401K and 403K plans. If you do this before you turn 59 and ½ years of age, then this penalty may kick in. This penalty does not effect the Roth IRA's though as long as you have contributed to your account for the last five years (it must be open for that amount of time to avoid this fee.)

First off, you will need to pay income tax on these funds that you are withdrawing since no income tax was assessed on the funds when you put them into the account. In addition, there is an additional fee, called the early distribution tax that kicks in at an additional 10 percent of the taxable amount of money that you are withdrawing. To learn just how much money you would have to pay for withdrawing these funds, visit the IRS website. There you will need form 5329 to help give you instructions on how to calculate this for the current year.

There are some times when you will not have to pay this additional fee. For example, if you have a direct rollover to a new retirement account, there is no fee to be paid. Or, if you did get a lump sum payment from your account but then rolled that money over into a new qualified retirement account within 60 days, there is no fee. If you become disabled either permanently or totally, if you become unemployed and use the funds for health insurance premiums or you bought a house or paid for college expenses for your children or dependant you may also qualify for no additional fees here.

You should invest the time in finding out the true cost of your early distribution penalty. Also, there are exceptions to every rule so be sure that you take the time to make sure that the exemptions you are hoping for can be found.

IRS Penalties |