Early Distributions From Retirement Plans

An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a "taxing" experience. Fortunately, there are exceptions to early distributions.

Any payment that you receive from your IRA or qualified retirement plan before you reach age 59½ is normally called an "early" or "premature" distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59½ rule that you should investigate if you make such a withdrawal. Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.

In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to "elective deferrals" that you contributed from your pay, your employer's contribution and any income earned on all contributions to the account. If you made any nondeductible contributions, their portion of the distribution is not taxed, since you've already paid tax on this amount.

There is a way to avoid paying any tax on early distributions, however. It is called a "rollover." Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to an eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days of when you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.

If the early distribution from an employer's plan is paid directly to you, your plan administrator will normally withhold income tax at a 20 percent rate. If you roll over the distribution to a new plan, you must replace that 20 percent of the funds that were withheld and deposit that amount in the new plan or you will owe taxes on that amount. To avoid the inconvenience of this withholding, you can have your old plan's administrator transfer the rollover amount directly to the new plan or a traditional IRA.

All early distributions must be reported to the IRS. You will report tax-free rollovers on lines 15a and 16a of Form 1040 along with any taxable distributions, but you will enter on line 15b or 16b only the taxable amounts you don't roll over.

Early distributions from retirement plans can involve complex tax issues. Make sure you understand the issues or get competent tax advice.

Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.

---

Another Tax Loophole

Just image, you are a small manufacturing company, business has... Read More

Tips and Simple Guidelines on How to Calculate Payroll Taxes

Managing a business small, medium or big requires you to... Read More

Paying Workers ? What Can You Write-Off?

As your business grows, you are going to need help.... Read More

Corporations Failing To Claim AMT Exemption Overpay Taxes By $11,000

Does your incorporated business pay alternative minimum tax ["AMT]? If... Read More

Failure To Pay Employment Taxes ? Penalties

As an employer, you must pay employment taxes if you... Read More

Small Business Tax Issues for Self-Employed Individuals

The United States is a nation of entrepreneurs. There are... Read More

Complaince of Tax Return in Electronic Commerce Taxation

Emerging Legal issues of Tax compliance of e-business Self-assessment system... Read More

Furnishing Evidence in E-Tax Compliance

Self-assessment relies on taxpayers voluntarily meeting their tax obligations. This... Read More

Small Business Tax Deduction - Write-Off Bad Debts

Practically every small business has receivables that it cannot obtain... Read More

How To Get An Instant Pay Raise

As a gentleman was leaving my class recently, he wanted... Read More

Deducting Points On Home Refinances

Deduction of Refinance PointsAny points that you pay in the... Read More

How To Claim CHILD TAX CREDIT The Right Way And Add An Extra $2,000 To Your Refund

The U.S. Department of Agriculture estimates that it costs nearly... Read More

Small Business Tax Credit - Americans with Disabilities Act

Many small businesses complain when confronted with the expense of... Read More

Save Money on Taxes - Is the Only Way to Get Your Tax Savings is to Sleep With an IRS Agent?

Tilting the Tax Laws in Your Favor.In order to accelerate... Read More

Reducing Taxes Through Dividend-Salary Mix Calculations

Should I take wages or dividends from my privately owned... Read More

Marriage or Divorce ? Check Your Social Security Number

Newlyweds and the recently divorced should make sure that names... Read More

The Implications of Income Tax Charge on Estate Planning

OverviewIn the Pre-Budget Report of December 2003 the Chancellor Gordon... Read More

Some Folks Pay A Lot Less Tax Than Others On Very Same Income?Did You Pay Too Much Tax In 2004?

Someone once remarked, "Next to being shot at and missed,... Read More

Tax Deduction for Alimony Payments? - Yes!

Over 50% of marriages end in divorce in the United... Read More

What Is Tax Law?

The federal tax code is complex. This complexity generally arises... Read More

Getting A Second Extension to File 2004 Taxes

Millions of people file tax return extensions every year. The... Read More

Tax Trap #5 -- Ignoring The IRS (and the 5 best ways to contact them!)

We all love to criticize the IRS, don't we? And... Read More

Anticipating Your IRS Refund Can Cost You Plenty

While accountants are reaching for aspirin, millions of Americans are... Read More

How to Cut Duty Cost and Increase Profit as an Importer

Import duties continue to be significant elements in the cost... Read More

E-commerce Taxation

The means and types of businesses have transformed with advent... Read More

Rental Property Tax Deductions

Own residential rental properties? This article discusses how income from... Read More

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their... Read More

Donating Cars To Charity - New Tax Rules

On June 3, 2005, the IRS released guidance on charitable... Read More

Tax Tips - Which Tax Form Is Right For Me?

IRS Tax forms can be confusing.Am I a 1099 or... Read More

Are You Overpaying Taxes If You Use Tax Preparation Software?

For many business owners the answer to this quandary is... Read More

Navigating The Internet Sales Tax Laws

QUESTION: I have been contacted by my local city... Read More

Military Reservists, Enlistees May Get Deferral of Back Taxes

Reservists called to active duty and enlistees in the armed... Read More

SFR Substitute for Returns: IRS Action on Non-Filers

In the latest Star Wars episode, the evil empire executes... Read More