Tuesday, March 03, 2009

10 Ways to Avoid Tax Traps with an Early Retirement Distribution

  • 10 Tax Issues with Early Retirement Plans

  • The IRS alerts you to the following information regarding early retirement programs:
    [1] Most withdrawals from IRAs before age 59.5 will be treated as early distributions.
    [2] Most early distributions are subject to a 10% (of distribution) tax. On a traditional IRA, the amount received is usually taxable income as well.
    [3] All early distributions must be reported to the IRS, even if not subject to tax.
    [4] The early distribution tax can be avoided (or mitigated) by rolling funds into a qualified retirement plan or another IRA within 60 days. You must roll the entire amount into the IRA to oompletely avoid taxation.
    [5] Monies paid to you or a beneficiary from a traditional IRA generally are taxable income.
    [6] Any part of a distribution from a traditional IRA which was initially nondeductible is not taxed when withdrawan.
    [7] Withdrawals from a Roth IRA are not taxed (except for earnings on the Roth investment)
    [8] Unless you made nondeductible contributions to other retirement plans; amounts received from those plans would be treated as taxable income.
    [9] Certain early distributions, including first home purchase, certain educational expenses and costs associated with becoming disabled, may escape the 10% early distribution tax.
    [10] IRS Publications 575 and 590 can be helpful if you are receiving early retirement distributions.

    The article provides a concise summary of tax implications from distributions from IRAs and some pension plans. It needs to be more clear on the tax implications of salary-based bonuses for early retirement and post-retirement fringe benefits.


    Blogger alex said...

    This comment has been removed by a blog administrator.

    8:48 AM  
    Blogger jenny said...

    Greats tips. It is so important for people reaching the retirement age to understand the traps that can hinder their retirement progress. I will continue to reference your site in the future

    Jen -http://www.degreesinbusiness.org

    11:37 AM  

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