Retirement Tax Penalties

Retirement plans are a great way to save for retirement that incur less taxes, but early withdrawals (those made before you reach 59 ½) will incur penalties. To ensure that you are using your funds for retirement purposes only, the government will penalize you 10% or more for early withdrawals, depending on the type of account.

Qualified Retirement Plan

A qualified retirement plan includes a 401K, a qualified employee annuity plan, a tax-sheltered annuity plan and an eligible compensation plan.

Rollover

Rollover funds generally do not incur a 10% penalty. However, rolling funds from an IRA to a Roth must be done within 60 days to avoid the tax penalty.

Exceptions

There are six exceptions to the penalty for early distributions: distributions upon your death, permanent disability, distributions to an IRS Levy, distributions to qualified reservists, lifetime distributions as equal payments and medical expenses over 7.5% of your gross income.

Exceptions for non-IRA

For retirement accounts other than an IRA, there are three exceptions: distributions received from an employer after being separated (and you are at least 50 or 55, depending on the type of job), distributions made to an alternate payee and distributions of dividends.

Reporting

Report the 10% penalty tax on a Form 1040, as well as a Form 5329, depending on the circumstances. As always, if you are overwhelmed by your retirement tax penalties, contact a financial planner or accountant.

Resources

• IRS Topic 558
• Tax Penalty for Early Distributions