Early distribution are amounts withdrawn from IRA or annuity before taxpayer reaches age 59 ½. The additional tax is 10% on that amount distributed and must be included in gross income. This tax is in addition to any regular income tax. However, certain exemptions to this penalty may apply.
-Example math: Let’s say you want to withdraw $2,000 at age 55 and you are in the 12% tax bracket. Your total tax cost would be $440.00. This is added by combining $200.00 (10% of the distribution) plus $240.00 (12% of 2,000 – according to your tax bracket).
Common Exceptions To Early Distribution Penalties
When distributions…
- Are made to a beneficiary on (or after) death of the employee
- Result from employee having a qualifying disability or terminal illness
- Are periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee and the beneficiary
- Are made to an employee for medical care
- Are federally declared disaster distributions
- Are qualified higher education expenses
- Are used to pay medical insurance premiums of an unemployed individual
- Are used to pay first-time homebuyer expenses
- Certain financial emergency distributions
- Are distributions by victims of domestic abuse
Qualified distributions from a Roth IRA are not included in the taxpayer’s gross income and are not subject to the additional 10% early withdrawal tax.
To be a qualified distribution from a Roth IRA, the distribution must satisfy a 5-year holding period and must meet one of the following requirements:
- Made on or after the date on which the individual attains age 59 ½.
- Made to a beneficiary on or after the individual’s death
- Attributed to the individual being disabled
- Distributed to pay for “qualified first-time homebuyer expenses”.
Distributions are treated as made from contributions first, conversions second and then when the distribution exceeds these amounts it is considered “earning” and will be taxed.
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