Were you one of the hundreds of thousands of folks in 2010 who needed to take an early distribution from a retirement plan in order to make ends meet? Or was your tapping of your nest egg brought about by a wonderful opportunity, such as a special trip, rather than by economic necessity.
In either event, if you took an early distribution from a retirement account during 2010, there will almost inevitably be an impact on your 2010 tax liability. Here are some points you will want to keep in mind as you prepare your 2010 tax return:
- Payments you received from a qualified retirement account before you reached age 59 ½ are generally considered “early” or “premature” distributions.
- Such “early” distributions are usually subject to an additional 10 percent tax.
- Such “early” distributions must be reported to the IRS.
- Retirement fund distributions which you rollover into another IRA or some type of qualified retirement plan are not subject to that additional 10 percent tax. However, you must complete the rollover within 60 days following the day you received the distribution.
- Generally speaking, the amount you roll over will be taxed when that new plan makes a distribution to you, or to your beneficiary.
- If you made any “nondeductible contributions” to an IRA and later take one or more “early” distributions from that IRA, the portion of the distribution which is attributable to those “nondeductible “contributions will not be taxed.
- If you received an “early” distribution from a Roth IRA, the distribution which is attributable to your prior contributions will not be taxed.
- If you received a distribution from any other type of qualified retirement plan, the entire distribution will generally be subject to tax, unless you made after-tax employee contributions to that plan.
- Exceptions to the rule regarding the “10 percent early distribution tax” include: distributions used to purchase a first home; distributions used to cover certain medical or educational expenses; distributions taken because you are disabled.
If you need more detailed information about the ins/outs and tax consequences of early distributions from a retirement plan, see “IRS Publication 575: Pension and Annuity Income” or and “IRS Publication 590: Individual Retirement Arrangements (IRAs)”. You can find them online at www.IRS.gov (or by calling 800-TAX-FORM (800-829-3676))