Some small business owners — or any taxpayer with an Individual Retirement Account (IRA) or retirement plan, may need to take out money early from their plan. However, doing so can trigger an additional tax on early withdrawals. They would owe this tax on top of other income tax they may have to pay. Here are a few key points to know provided by the Internal Revenue Service. (Note: Everyone’s situation is different so you should check with your trusted financial advisor before making any decision about money.)
Early withdrawals | An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.
Additional tax | Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.
Nontaxable withdrawals | The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.
Rollover | A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. They normally have 60 days to complete a rollover to make it tax-free.
Exceptions | There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
Disaster Relief | Participants in certain disaster areas may have relief from the 10-percent early withdrawal tax on early withdrawals from their retirement accounts.
File Form 5329 | Taxpayers who took early withdrawals last year may have to file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax returns.
Additional IRS resources
Interactive Tax Assistants
- Do I Need to Report the Transfer or Rollover of an IRA or Retirement Plan on My Tax Return?
- Do I Meet an Exception to the Additional Tax on Early Distributions from IRAs or Retirement Plans?
IRA FAQs | Distributions/Withdrawals
Publication 590-B | Distributions from Individual Retirement Arrangements
Publication 575 | Pension and Annuity Income