Life Events

Retirement accounts are built for the long haul, and the tax rules reflect that. Pull money out before you reach the age the IRS considers retirement age, and you may owe ordinary income tax plus an additional early-withdrawal tax on the taxable amount. Sometimes, though, life calls for the money sooner. Knowing your options can keep the cost down.

Start With the Basics

Distributions from traditional IRAs and employer plans such as 401(k)s are generally taxed as ordinary income because the contributions were tax-deferred. Withdrawals taken before the qualifying age are usually hit with an additional percentage tax on top of that. Roth accounts follow different ordering rules: your own contributions can generally come out first without tax, while earnings are treated differently.

Exceptions Worth Knowing

Congress has carved out a number of situations where the additional tax does not apply, even though regular income tax may still be due. Depending on the account type, these can include:

• Total and permanent disability.
• Certain unreimbursed medical expenses above a threshold tied to your income.
• Qualified higher-education expenses (for IRAs).
• Separation from service in or after a certain year of age (for employer plans).
• Distributions to beneficiaries after the owner's death.
• A limited first-time home purchase (for IRAs).
• Qualified birth or adoption expenses and certain emergency or disaster-related withdrawals, which Congress has added in recent years.

The details, amounts and age cutoffs change from time to time, so check current rules before relying on any exception.

Substantially Equal Periodic Payments

Another route is a series of substantially equal periodic payments, often called a 72(t) plan. You commit to a calculated stream of withdrawals using an IRS-approved method, and the early-withdrawal tax is waived. The catch is rigidity: you generally must continue the payments for five years or until you reach the qualifying age, whichever is later. Changing the schedule can trigger the additional tax retroactively, with interest. This is a strategy to set up with professional guidance.

Alternatives to Consider First

• Plan loans. Some employer plans let you borrow from your balance and repay yourself with interest. Leaving your job can make the balance due quickly.
• Rollovers. A short-term, 60-day rollover is possible but easy to get wrong, and only allowed once per year for IRAs.
• Other sources. Taxable savings, a home equity line or a hardship arrangement with a creditor may cost less over time.

Plan the Withdrawal

If you do withdraw, take only what you need, consider the tax withholding so you are not surprised in April, and think about state tax as well. Check current Georgia treatment of retirement income at dor.georgia.gov. The IRS explains the early-distribution rules at irs.gov.

Weighing an early withdrawal? Reach out to our office and we will help you compare the real cost of each option.