The term “early distribution” refers to money withdrawn from a traditional IRA, 401(k), or other retirement plan prior to the account holder reaching the age of 59½. These types of early distributions are subject to a 10% penalty, in addition to the normal income tax due on the distribution. As a result, you’ll want to think long and hard before taking an early distribution from your retirement accounts.
The tax code does allow for some early distributions without the tax penalty applying, however. For example, early distributions from a traditional IRA may be exempt from the 10% penalty if the funds are used for qualified higher education expenses, qualified first-time home buyer expenses (up to $10,000), or health insurance premiums during unemployment. Early distributions from a 401(k) may be exempt from the 10% penalty if the funds are used for qualified medical expenses, or expenses related to military reservists called up for active duty. Other exceptions may also apply, so be sure to review the tax rules before taking any early distributions to make certain you understand the tax ramifications of your actions.
If you’re considering an early distribution, make sure to consult with Taxation Solutions, Inc. first. Our tax professionals can help you understand the potential tax impacts of an early distribution and help you determine what course of action makes the most sense for your specific circumstances.