If you take money from retirement qualified plan or IRA before you reach the age of fifty nine and half years,it is called early distribution. You need to pay ten percent of income tax on the money that you have taken from the retirement account.For this there are some exceptions and you can get the exemption only when you qualify for them.Any way all this exemptions exempt you only from early distribution ten percent tax and not the entire income tax. You have to pay the tax as per the rules.
Exceptions for early distribution income tax:
1. If you are at the age of 59 ½ years.
2. If you are dead or disabled.
3. If you choose to take equal periodic payments.
4. If you are atleast at the age of 55 years at the time of leaving your job.
5. If distributions are dividents from ESOP.
6. If you take money for medical expences.
7. If you take money for child support or for QDRO.
8. If withdrawn money is used for tax lavy.
9. If the money is a refund.
Explanations:
1.You shall be older than 59 ½ years by the day you withdraw money and this is not sufficient to happen on that year. Many qualified plans will not allow you to take your money untill you leave the job.
2.If the unfortunate death happens,the money distributed is free from advance tax.You can rollover the distribution money from your spouce account into a IRA.Once the transfer is over you are the sole owner of the money and you are not going to get the tax exemption as the money is in your name.
If you are diseased then you can take portion of money and you need not pay ten percent early tax for distribution. This disability must be permanent to get the tax exemption.
3.Substantially equal periodic distribution is available for every one with out any exception and this makes it very good and attractive offer.Here the distribution is available for entire life and you need not pay advanced tax distribution in this case. Here you have to compute payments as per the rules and you will get exemption only when you comply this rules. You must resign before you take this offer. If you are getting money from IRA you need not leave the job to get the distribution benefit.
4. If you are at the age above 55 and you leave the job, you satisfy the rule. Here you can change the job and join with new employer and still get the exemption.You need not be above 55 at the time of retirement and it is all right if you are going to be above that age by the end of december 31 of that year. This exemption is not avilable when you retire early and take out money after 55. You will get the offer only when you retire in 55 year.
5.You need not pay early distribution tax when you get money from ESOP with out any exceptions.
6.For medical expenses if you withdraw money you can take exemption for the amount that is above 7.5% of your yearly gross income. The original 7.5 % money is subjected to advanced tax.
7. If you are going to spend for child support or going to use the money for settlement with your former spouse, you will get exemption for early tax distribution as long as there is QRDO that orders payments. A QDRO arises when a separation or divorce agreement and involves court order.But this shall not be a private agreement and it shall be official QRDO.
8.If you need to pay lot of income tax and you are intended to pay from your retirement money,you will get advanced tax exemption.
9.If you receive refunds for retirement fund above the permitted level,you need not pay any advanced tax.
If you have not met any of the above mentioned exceptions,you need to pay 10% early distribution tax for the taxable money.
Rules for all IRA other than Roth IRA:
There are six rules applicable for all IRA.
1 . If you have IRA,you will not get tax exemption even if you are above 55 years and you will get early tax distribution exemption only when you are above 59 ½ years.
2 . No QDRO exception for the investments done in IRA.
3 . child support can not go into IRA.
4 . If you are unemployed at the moment and used the money to pay premiums of health insurance you need not pay advanced tax distribution. For this you must be unemployed for twelve continuous weeks.
5 . If you use IRA distributed money to the expenses of higher education you need not pay early distribution tax. This can be used for books,tution and room rent. The money can be paid for the owner of IRA,spouse,child or graand child. The distribution shall not exceed IRA amount.
6 . You will get early tax distribution when you use the money for buying a new home or its reconstruction. You shall buy the home with in 120 days of receiving the funds. This exemption is available only for the first time buyer. You or your spouse shall not own a house during the previous two years.The owner of the home shall be the owner of IRA Also. The life time limit for this exemption is $10000 and it can be used only once in the life either for you or for your child.
If you receive distribution with in two years of starting contribution you need to pay higher tax of 25% and after this two years it will come back to 10%.
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Exceptions for early distribution income tax:
1. If you are at the age of 59 ½ years.
2. If you are dead or disabled.
3. If you choose to take equal periodic payments.
4. If you are atleast at the age of 55 years at the time of leaving your job.
5. If distributions are dividents from ESOP.
6. If you take money for medical expences.
7. If you take money for child support or for QDRO.
8. If withdrawn money is used for tax lavy.
9. If the money is a refund.
Explanations:
1.You shall be older than 59 ½ years by the day you withdraw money and this is not sufficient to happen on that year. Many qualified plans will not allow you to take your money untill you leave the job.
2.If the unfortunate death happens,the money distributed is free from advance tax.You can rollover the distribution money from your spouce account into a IRA.Once the transfer is over you are the sole owner of the money and you are not going to get the tax exemption as the money is in your name.
If you are diseased then you can take portion of money and you need not pay ten percent early tax for distribution. This disability must be permanent to get the tax exemption.
3.Substantially equal periodic distribution is available for every one with out any exception and this makes it very good and attractive offer.Here the distribution is available for entire life and you need not pay advanced tax distribution in this case. Here you have to compute payments as per the rules and you will get exemption only when you comply this rules. You must resign before you take this offer. If you are getting money from IRA you need not leave the job to get the distribution benefit.
4. If you are at the age above 55 and you leave the job, you satisfy the rule. Here you can change the job and join with new employer and still get the exemption.You need not be above 55 at the time of retirement and it is all right if you are going to be above that age by the end of december 31 of that year. This exemption is not avilable when you retire early and take out money after 55. You will get the offer only when you retire in 55 year.
5.You need not pay early distribution tax when you get money from ESOP with out any exceptions.
6.For medical expenses if you withdraw money you can take exemption for the amount that is above 7.5% of your yearly gross income. The original 7.5 % money is subjected to advanced tax.
7. If you are going to spend for child support or going to use the money for settlement with your former spouse, you will get exemption for early tax distribution as long as there is QRDO that orders payments. A QDRO arises when a separation or divorce agreement and involves court order.But this shall not be a private agreement and it shall be official QRDO.
8.If you need to pay lot of income tax and you are intended to pay from your retirement money,you will get advanced tax exemption.
9.If you receive refunds for retirement fund above the permitted level,you need not pay any advanced tax.
If you have not met any of the above mentioned exceptions,you need to pay 10% early distribution tax for the taxable money.
Rules for all IRA other than Roth IRA:
There are six rules applicable for all IRA.
1 . If you have IRA,you will not get tax exemption even if you are above 55 years and you will get early tax distribution exemption only when you are above 59 ½ years.
2 . No QDRO exception for the investments done in IRA.
3 . child support can not go into IRA.
4 . If you are unemployed at the moment and used the money to pay premiums of health insurance you need not pay advanced tax distribution. For this you must be unemployed for twelve continuous weeks.
5 . If you use IRA distributed money to the expenses of higher education you need not pay early distribution tax. This can be used for books,tution and room rent. The money can be paid for the owner of IRA,spouse,child or graand child. The distribution shall not exceed IRA amount.
6 . You will get early tax distribution when you use the money for buying a new home or its reconstruction. You shall buy the home with in 120 days of receiving the funds. This exemption is available only for the first time buyer. You or your spouse shall not own a house during the previous two years.The owner of the home shall be the owner of IRA Also. The life time limit for this exemption is $10000 and it can be used only once in the life either for you or for your child.
If you receive distribution with in two years of starting contribution you need to pay higher tax of 25% and after this two years it will come back to 10%.
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