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,
October 24, 2013

Early Withdrawal from Retirement AccountQ. 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?

A. 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 Income.

Related Tips

You May Also Like...