Understand the tax impacts of taking retirement plan income early


Life’s Financial Journeys

Heading Off to College
Getting Out on Your Own
Blending Two Lives
Having a Child
Emptying the Nest
Entering Retirement
Divorce
Death of a Life Partner
Military Life

Most retirement plans are tax-sheltered. This means that taxes were not paid on the funds deposited into the plan over your working life.

As a result, withdrawals from the plans will be taxed. As a general rule, withdrawals that occur prior to age 59½ are subject to a 10% withdrawal penalty in addition to the tax owed based on one’s income tax bracket.

Penalties can be avoided if the withdrawals are for certain approved uses or occur after age 55 at a rate of withdrawal specified by IRS rules. The goal of the rules is to ensure that the funds are not depleted too quickly.

The following resources may assist you in understanding the tax impacts of taking retirement plan income early.

Early Withdrawals from IRAs

Exceptions to IRA Early Withdrawal Penalties

Early Withdrawals from 401(k) Plans

Penalty Free Early Withdrawals from IRAs and 401(k) Plans

IRS Rules on Early Withdrawals from Qualified Retirement Accounts


Entering Retirement Tasks

1. Selecting your retirement lifestyle
2. Estimating your monthly retirement income
3. Setting up your spending plan
4. Enrolling in Social Security and Medicare
5. Managing taxes during retirement

Managing taxes during retirement Subtasks

1. Understand how your Social Security benefits are taxed
2. Understand how income from your IRA, 401(k), 403(b), and other retirement accounts are taxed
3. Understand the tax impacts of taking retirement plan income early
4. Take mandatory distributions before age 70½ to avoid tax penalties

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