Taking an IRA distribution before age 59½ is one of those times when a worker must watch the calendar. You’ll want to be acting quickly and counting the days, as you’ll see here.
Sometimes a taxpayer wants to move money from one retirement account to another, or perhaps he/she receives an unexpected distribution directly from a retirement account. If the taxpayer is younger than 59½ years old, a clock starts ticking on arrival. He/she must roll over that money in a similar retirement account within 60 days, or the money will be heavily taxed.
This is not a time to dawdle or delay. If the rollover is not deposited on time, the IRS will charge the person’s normal income tax plus another 10 percent tax for an early distribution.
Can the problem be avoided? Yes, by using a “direct rollover.” With that strategy, the taxpayer never touches the distributed cash. The retirement plans themselves move the money.
This area of early distributions has a slew of exceptions to the extra 10 percent tax. Basically, if the taxpayer missed the 60-day deadline for some reason outside his/her control, the IRS can waive the penalty tax. A traditional IRA also waives the 10 percent tax on withdrawals of as much as $10,000 for taxpayers who want to buy their first homes.
There are a number of exceptions and rules involved with early IRA distributions. Feel free to contact Eric Buechler, owner of EricJohn Ltd., for guidance on the tax implications of retirement plans.