We often meet with clients to discuss their need for cash for various reasons and one of the bigger assets most folks have is their retirement plans. Tapping into those plans however can have some horrific tax consequences if not done right. Withdrawing money from retirement plans can trigger an additional tax on the early withdrawals. The taxpayer would owe this tax on top of other income tax they may have to pay. In some cases, and at some income levels, that can mean losing more than they have in their savings. Here are a few key points to know:
- Early withdrawals: An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.
- Additional tax: Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.
- Nontaxable withdrawals: The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.
- Rollover: A rollover happens when someone takes cash or other assets from one plan and puts it into another plan. They normally have 60 days to complete a rollover to make it tax-free.
- Exceptions: There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
- Disaster Relief: Participants in certain disaster areas may have relief from the 10-percent early withdrawal tax on early withdrawals from their retirement accounts.
As you can see, there may be opportunities for planning around the need to cash out a retirement plan, but it is not like any other bank account that you can just draw from. If you are thinking about withdrawing money from your retirement plan, give us a call to determine if there are ways to tap into these accounts without adverse tax consequences.