Early Retirement Distributions, Social Security Benefits, and Federal Income Taxes

Early Withdrawals from Retirement Savings Accounts

An early withdrawal or an early distribution is when you withdraw money from your IRA, 401(k), or any other qualified retirement savings plan before reaching age 59 1/2. You should report the early distribution as income on your tax return. The retirement plan administrator should send you Form 1099-R, Distributions from Pensions, etc., during tax filing season the year following receipt of the early distribution.

Qualified retirement plans are:

• Traditional IRA or a Roth IRA
• Employee plan such as a 401(k)
• Employee annuity plan such as a 403(a)
• A 403(b) or similar plan for employees of public schools and tax-exempt organizations

Penalties and Withholding

In order to discourage people from using their retirement savings, the IRS charges an additional tax penalty on early withdrawals from retirement plans. With certain exceptions, the IRS charges a 10% penalty on early withdrawals from qualified retirement plans. This penalty is in addition to federal income tax. Early distributions of qualified retirement plans are subject to federal income tax. If your tax withholdings and/or estimated tax payments are not enough to cover your taxes and the 10% penalty, you will owe money to the IRS when you file your return.

Exceptions to the Penalty

Distributions from a qualified retirement plan will NOT be subject to the 10% additional tax penalty in the following circumstances:

• They were permissive withdrawals from a plan with automatic enrollment features. (Does not apply to IRA plans).
• They were corrective distributions and/or earnings related to excess contributions.
• Distributions that are made upon the death or total permanent disability of the plan participant.
• The distributions were required by a divorce decree or separation agreement under the terms of a "qualified domestic relations court order.
• You received the distribution as part of "substantially equal payments" over your lifetime.
• You received distributions of dividends from an Employee Stock Ownership Plan.
• They were levied by the IRS from a qualified retirement plan.
• If you used the withdrawal to pay for medical expenses exceeding 10% of your adjusted gross income.
• They were a qualified military reservist distribution.
• You were age 55 or over and you retired or left your job. (Does not apply to IRA plans).
• You were age 50 or over and you retired or left your job as a public safety employee of a state government. (Does not apply to IRA plans).

The following exceptions ONLY apply to retirement plans that are Traditional or Roth IRAs:

• The distribution was made to pay medical insurance premiums while you were unemployed (or up to 60 days after re-employment).
• The withdrawal was made to cover qualified education expenses.
• The distribution (up to $10,000 only) was made to purchase your first home. You cannot have owned a home in the previous two years to qualify for this exception.

Social Security Benefits and Taxes

• Social Security retirement benefits, survivor benefits, and disability benefits MAY be taxable income only if you or your spouse have additional income such as wages, self-employment, retirement income, interest, or dividends, among others. Supplemental Security Income (SSI) payments are not taxable.
• If the ONLY income you and/or your spouse received was Social Security benefits, your or your spouse’s benefits generally are not taxable and you may not have to file a tax return.
• The IRS uses a formula to determine if any of your or your spouse/child's Social Security benefits are taxable. However, the IRS tax codes and guidelines can be very confusing. You should consult with a professional tax preparer to determine if any of the Social Security benefits are taxable. If you have income in addition to your benefits, there is a chance that you may have to file a return even if none of your benefits are taxable.