Early Retirement Distribution Penalties (and how to avoid them.)

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If you take money out of any tax-deferred retirement account, such as 401(k), or IRA, before age 59-1/2, the distribution will be subject to an additional 10% penalty tax on the amount withdrawn. This video describes how the penalty works, and tells you under what circumstances you can get an exception to the penalty.
2023 UPDATE:
For distributions for medical expenses, any withdrawal over 7-1/2 percent of Adjusted Gross Income is not subject to the 10 percent penalty. This is lower than stated in the video.
Starting in 2023, you may make one emergency hardship withdrawal of no more then $1,000, without penalty. For withdrawals over $1,000, the penalty applies to the entire distribution.
For more information on IRA distributions, click here: • IRA 101: Traditional I...
For more information on 401(k) plans, click here: • 401(k) Plans and How T...
To learn more about what is on your 1099-R Form, click here: • What is a 1099R?
Additional resources and information:
IRS Publication 590-B "Distributions from Individual Retirement Arrangements": www.irs.gov/pu...
IRS Form 1099R: "Distributions from Retirement Plans": www.irs.gov/pu...
IRS Form 5239: "Additional Taxes on Qualified Plans": www.irs.gov/pu...
IRS Form 8915-F: "Qualified Disaster Distributions": www.irs.gov/pu...
Investopedia: "Nine Penalty-Free IRA Withdrawals": www.investoped...
Nerdwallet: "Cashing Out a 401(k): What a 401(k) Early Withdrawal Really Costs": www.nerdwallet...
The Tax Geek on Twitter: @taxgeekusa
The Tax Geek on Reddit: www.reddit.com/r/aksataxgeek
Image Credits:
Pexels.com
Wikimedia Commons
The Image of "Ronald" was generated by thispersondoesnotexist.com and any resemblance between this image and any persons, living or dead, is coincidental and not intended.
Intro Music: "Bluesy Vibes" - Doug Maxwell - RU-vid Audio Library
Background and Outro Music: George Street Shuffle, Kevin McLeod, incompetech.com via RU-vid Audio Library
DISCLAIMER: This video is for educational and informational purposes only. It is not intended to render tax advice or investment advice for individual situations. If you have questions regarding your particular situation, please consult with a qualified tax or investment professional.
The information in this video is current as of date of publication, and is subject to changes enacted by Congress or the IRS.

Опубликовано:

12 сен 2024

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Комментарии : 14

@TheTaxGeek 9 месяцев назад

2023 UPDATE: For distributions for medical expenses, any withdrawal over 7-1/2 percent of Adjusted Gross Income is not subject to the 10 percent penalty. This is lower than stated in the video. Starting in 2023, you may make one emergency hardship withdrawal of no more then $1,000, without penalty. For withdrawals over $1,000, the penalty applies to the entire distribution.

@daisyalicia 6 месяцев назад

Great video, I just subscribed for future tips! On my end, I have been unemployed since the beginning of this year and my traditional IRA has about $4k. If I take out all the distributions, if I'm correct, I will pay the 10% penalty when I file next years taxes. I am in California and on the form for distributions request it says for Federal I can withhold minimum 10% of taxes but I would like to put the correct amount so that I dont owe taxes on this next year. And for State taxes I really don't know about how much to withhold. I am single tax payer on a 22% tax rate. What would be a good percentage to withhold on federal and state? I understand that i shouldnt consider your help as advice :)

@TheTaxGeek 6 месяцев назад

It's really impossible to know the exact amount of tax (penalty, state, and local) on that withdrawal because we don't know what the future will bring. If you've already had 2-1/2 months of unemployment, it's quite likely you'll drop out of the 22% marginal tax rate. Or next month you might land a job that paid much more than your last job. That being said, all I'll tell you is that when one of my clients presents a 1099R with an early retirement withdrawal, I get concerned if much less than 20% is withheld for Federal Tax and 5% for state tax.

@shortafewbolts 2 года назад

Is the tax rate for federal and state dependent on the amount of pension?

@TheTaxGeek 2 года назад

Your Federal Tax rate depends on all your income taken together, less any adjustments or deductions. Most states with a graduated tax are similar.

@sandsand07 Год назад

I loss my job about 2 years. Know I get disability. I want to take all of my 401 k . I’m 60 years old .Do I still have to pay 10% .

@caligula4402 Год назад

I’ve checked with my current 401K plan administrator and confirmed that the plan does not have provisions for the Rule of 55. Thus, any distributions would be subject to the 10% early withdrawal penalty -- bummer. But based on your video, I can essentially get “reimbursed” for the 10% penalty so long as I fully qualify for the Rule of 55 and I fill out Form 5329 (line 2). Have I got that right? Also, thanks for creating the video!

@TheTaxGeek Год назад

Yes. If you’ve already filed your taxes this year, you can file just the form as a stand alone.

@caligula4402 Год назад

@@TheTaxGeek Many thanks ! 🙏

@sabfran6812 Год назад

My financial institution has code 1 in box 7 instead of the three mentioned. My tax preparer told me, I have to contact my financial institution and request an corrected 1099R. When I called back they told me it can't be corrected and that it's the responsibility of my tax preparer to fil out a 5329 form. What do I do???

@TheTaxGeek Год назад

If you qualify for an exception to the early withdrawal penalty and there's a "1" in box 7, you need to fill out a Form 5329 to tell the IRS what exception you're claiming and how much of the distribution you're exempting from the early withdrawal penalty. Your payer will only put codes other than "1"or "7" in box 7 when it has knowledge beforehand of the situation.

@mixedmedia_artist Год назад

😮what are the penalties for early withdrawal from a traditional IRA. I've run into financial troubles. And I know there is 10% penalties but is there additional taxes at the end of the year when filing. What forms would i have to submit when filing at tax time?

@TheTaxGeek Год назад

For an early IRA withdrawal, you have any Federal and State income tax on the withdrawal, plus a 10% penalty. The 10% penalty can be waived under very specific circumstances, which I review in the video. If you believe you qualify for a waiver of the penalty for some or all of the distribution, the waiver is claimed on Form 5329, which is included with the tax return.

@mixedmedia_artist Год назад

@@TheTaxGeek thank you. I'm just wondering what federal and state income tax amount would be. Is this something I'll have do come tax time? Any further info would be greatly appreciated.