ASK THE EDD LAWYER – ARE THERE PENALTIES IF I MAKE AN EARLY WITHDRAWAL FROM MY RETIREMENT PLAN
By Robert S. Schriebman
In late March 2014, the U.S. Tax Court decided the case of J.L. Fields v Commissioner. It seems that Ms. Fields was under the age of 59-1/2 at the time she withdrew money from her retirement plan. She was facing a 10% additional tax under Section 72(t) of the IRC. The tax court found that Ms. Fields did not use the withdrawn funds to pay medical expenses or health insurance premiums, or to make a first-home purchase. In addition, she was not disabled during the tax year. Ms. Fields’ defense was that she told her bank to withhold her income taxes at the time of distribution, but the bank failed to honor her request. The Tax Court held that Ms. Fields must pay the 10% early distribution tax.
Taking money out of your retirement plan prematurely may trigger an additional tax. The IRS recently published Tax Tip 2014-35 setting forth a few things you should know about early withdrawals from retirement plans.
First of all, what is an “early withdrawal?” This normally means taking money out of your plan before you reach the age of 59-1/2. If you make an early withdrawal you must report the amount you received to the IRS and pay taxes on that money because it is ordinary income. You may also have to pay an additional 10% tax on the amount you withdraw. The additional 10% tax does not apply to nontaxable withdrawals. Nontaxable withdrawals include you withdrawing your cost to participate in your retirement plan. Your cost includes contributions that you paid tax on before you put the money into your plan.
Secondly, there is no tax when you rollover your retirement plan into another plan. You usually have 60 days to complete the rollover to make it tax free. But be careful – you are allowed only one rollover per year.
Finally, there are many exceptions to the additional 10% tax. Some of the exceptions for retirement plans are different from the rules for IRAs. The Fields case above tells you that there are exceptions for withdrawals for medical expenses, health insurance premiums, being disabled, or purchasing your first home.
For additional information you may go on the IRS web site and review two key “Tax Topics”. See Tax Topic 557 – Additional Tax on Early Distributions from Traditional and ROTH IRAs, and Tax Topic 558 – Additional Tax on Distributions from Retirement Plans Other Than IRAs.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.