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Saving for Retirement is Important, and it is always a good idea to contribute to a retirement plan. However, it is important to understand that once you contribute to certain retirement plans you may not be able to withdraw the money without incurring some unintentional consequences.
So, if you have a retirement plan and are considering withdrawing money from it before you are eligible this may trigger an additional tax that will ultimately reduce your retirement savings.
1. If you withdraw funds from your qualified retirement plan before you reach age 59½ it is considered an early withdrawal, and you must report the amount you withdrew to the IRS. If you made an early withdrawal last year then you may have to pay income taxes as well as an additional 10% tax on the amount you withdrew.
2. There are, however, situations where the additional 10 percent tax does not apply. Nontaxable withdrawals consist of your cost to participate in the plan. This include contributions that you paid tax on before you put them into the plan. An example of a nontaxable withdrawal is a rollover. A rollover is a distribution of cash or other assets from one of your retirement plans to another. In order to make a rollover tax-free you must complete it within 60 days.
3. You should also be aware that if you make an early withdrawal from a retirement account, you may need to file Form 5329 with your federal tax return. This form is used to report additional taxes on qualified plans, including IRAs and other tax-favored accounts.
4. Prior to making an early withdrawal from a retirement account you should consider the tax consequences. It may even be a good idea to consult with a professional.