Taxes & Penalties on Early Distribution

IRA's and 401k's

• An individual retirement account (IRA) and 401(k) are two of the most common retirement accounts. IRAs are typically set up by individuals while 401k's are usually offered by employers. Withdrawing money from either of these accounts before you reach the age of 59-1/2 will result in a 10 percent early distribution penalty. You also have to pay taxes on the money that you withdraw.
  
  

Payment

• With early distribution, you pay the taxes and penalties at different times. After distribution, your retirement account provider will withhold 20 percent of the money for taxes. Then, when you file your income tax return at the end of the year, you will have to pay the 10 percent early distribution penalty. The 20 percent withholding may not be enough to cover the taxes, depending on your situation.
  
  

Roth IRA

• A Roth IRA allows you to withdraw money that you have directly contributed to the account before you turn 59-1/2. Roth IRA's are funded with after-tax money, so you are not receiving any tax benefit by taking the money out early. However, you cannot take out money from investment earnings without paying a penalty.
  
  

Exceptions

• While the majority of early distributions are taxable and penalized, the IRS does allow a few exceptions. For example, you can take $10,000 from your IRA before the age of 59-1/2 if you use the money to pay for your first home. You can also use IRA money to pay for qualified education expenses for a loved one.