I'm thinking about retiring early. What tax-related information should I know about?
Many people find it necessary to take out money early from their IRA or retirement plan. Withdrawals can trigger an additional tax on top of the income tax you may have to pay. Here are a few key points to know about taking an early distribution:
Early withdrawals - An early withdrawal normally means taking the money out of your retirement plan before you reach age 59½.
Additional tax - If you took an early withdrawal from a plan, you must report it to the IRS. You may have to pay income tax on the amount you took out plus an additional tax of 10%. Note: There are several exceptions to the additional tax. Some of the rules for retirement plans are different from the rules for IRAs. You can claim an exemption on Form 4229.
Nontaxable withdrawals - The additional 10 percent tax does not apply to nontaxable withdrawals. They include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
Rollovers are a type of nontaxable withdrawal. A rollover occurs when you take cash or other assets from one plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it tax-free.