What are the tax implications of early withdrawals from my retirement account? If I take distributions from my retirement account will I owe taxes or penalties? These are common questions that an individual may ask their CPA, accountant, tax attorney or tax professional and rightly so. Withdrawals, especially early withdrawals from a retirement account can greatly impact your tax owed to the Internal Revenue Service when you file your 1040 individual income tax return. The article below has been drafted by a Denver tax attorney at The McGuire Law Firm to discuss issues regarding taxation and withdrawals from retirement accounts.
Taking early distributions from your retirement account can create additional tax owed to the IRS. An early withdrawal would be deemed a withdrawal from your retirement plan before you obtain the age of 59.5 years. If you have withdrawn money from your retirement accounts, you need to report this income to the Internal Revenue Service. An additional 10% (ten percent) tax applies on the amounts withdrawn if these withdraws are considered early. This additional 10% tax does not apply to nontaxable withdrawals. A nontaxable withdrawal would include costs to participate in the plan you are enrolled or participating in. Your costs can also include contributions that you paid tax on proper to the contributions being placed into your retirement plan.
A rollover is an example and type of nontaxable withdrawal from your retirement account. Generally, a rollover is a distributions to you of the cash or other assets within one retirement account or plan that contribute to another retirement account or plan. Generally, you have 60 (sixty) days to complete a rollover and make sure it is a tax free rollover.
There are exceptions to the 10% additional tax on early withdrawals. Certain exceptions may be different for different types of retirement plans. The exceptions, such as withdrawals for medical payment mean that you avoid the 10% additional tax on the early withdrawal.
When early withdrawals are made from your retirement account, you may need to file a Form 5329, which is titled, Additional Taxes on Qualified Plans (including IRAs) and other Tax Favored Accounts. Form 5329 would be filed with your 1040 Individual Income Tax Return with the IRS.
It is important to make sure that you properly claim any early withdrawals and understand the tax laws surrounding a rollover from one retirement account to another. A Denver tax attorney at The McGuire Law Firm can assist you with your tax questions and matters. Whether you have a personal tax question or a business tax question a tax attorney at our firm can assist you.
Please contact The McGuire Law Firm to speak with a tax attorney and schedule your free consultation! A free consultation is offered to all potential clients, and we look forward to hearing from you.