Early Distribution from Your Retirement Account

As the economy has continued to resist real growth and unemployment has remained high, some people have resorted to tapping their retirement savings to pay bills.  There are some important things to consider before you take an early distribution from your retirement plan.

• Early distributions are usually subject to a 10 percent tax on top of any regular income tax on the amounts
• Any distribution that is not a rollover to another qualified plan is generally considered early or premature if you are not yet 59 1/2 years of age. (183 days after your 59th birthday)
• Rollovers to an IRA or qualified retirement plan are not subject to the additional 10 percent tax, but you must complete the rollover within 60 days after the day you received the distribution.
• Rollovers where you receive the funds, will usually have tax withheld, but you must put the gross balance that was in the prior account into your new account, including any withheld amounts.  Direct rollovers (from the old account trustee directly to the new one) are usually not subject to withholding.
• There are exceptions to the 10 percent early distribution tax, such as distributions for the purchase of a first home, certain medical or educational expenses, or if you are disabled.
• If you made nondeductible contributions to an IRA in prior years and now take early distributions, the portion of the distribution attributable to those nondeductible contributions is not taxed. The same rule applies to distributions from a Roth IRA.