Each tax season we experience one or more returns where the client has made a withdrawal from a retirement account to pay some type of personal expenditure. This usually results in a large of amount of tax due along with a possible penalty for early withdrawal if the client is under the legal age for a penalty free withdrawal.
Retirement accounts such as IRA’s, SIMPLE IRA’s, 401k’s and other retirement accounts, also referred to as “qualified accounts”, carry certain rules which when broken, can cause a financial burden on the individual who makes the withdrawal.
For a little background on this topic, most retirement funds created a tax deduction when you originally deposited funds into the account. Therefore, you have never paid tax on these funds. When these funds are withdrawn, you owe tax on the total amount withdrawn in the year of the withdrawal. If you are under the age of 59 ½ years old, you may also owe a 10% early withdrawal penalty in addition to the tax owed on the withdrawal. This many times results in a tax and penalty being due in excess of 25% of the withdrawal. There are a few exceptions to paying the penalty, which we could cover with you. So as you can see, you should be asking questions before making withdrawals from your retirement accounts for any reason. You may also wish to contact us about IRA rollovers. We regularly have clients tell us they were informed of the rules of rolling over their retirement and the information is incorrect and causes tax to be due on the amount withdrawn from a retirement account. There are specific amounts of time and procedures that must be followed.
Treating your retirement account as a “savings account” can result in a financial burden on you and your family if not properly planned. So if you are considering making a withdrawal from any type of retirement plan for any reason, please take a few minutes to call our office and discuss this with the accountant that handles your tax return. We can often suggest better ways to cover the expense you are trying to pay from these funds. We are available all year to help you with these issues along with any other tax questions you may have.