Many people do not realize that early distributions from retirement accounts qualify as income for tax purposes. The realization may come in a very disturbing way — such as a 1099 and/or a letter from the IRS stating there has been underreported income. If nothing is done to correct this, and if no exceptions exist, it will likely result in a tax debt. A retirement withdrawal is normally considered “early” if done prior to age 59 1/2. The tax impact of an early withdrawal is the topic of the IRS’ latest installment in its Tax Tips series (IRS Tax Tip 2012-34), and is outlined here:
- early distributions are subject to an additional 10% tax and must be reported to the IRS
- rollovers are generally not subject to this tax; not until the new plan actually makes a distribution
- nondeductible contributions to an IRA are not taxed in an early distribution
- early distributions attributable to prior contributions to a Roth IRA are not taxed
There are several exceptions to the 10% early withdrawal tax, which are discussed fully in Publications 590 and 575.