Tags: Retirement | retirement | early | penalty

5 Things to Know About Early Retirement Penalty

By    |   Friday, 12 June 2015 11:26 AM

Uncle Sam encourages Americans to save for retirement by providing tax advantages for the money they invest. The catch is that the age at which this money can be accessed is strictly regulated. Touch it early, and there is a tax fine to pay.

Pre-tax dollars can be used for money placed in a 401(k) or other individual retirement account. This lowers the annual income and the tax burden on the worker. Roth IRAs require post-tax dollars, but grow tax free until retirement.

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If you are tempted to withdraw money, here are five things the Internal Revenue Service advises about early retirement penalties.

1. The IRS can take 10 percent
Money taken out of an IRA will be considered income in the year it is removed. It will be taxed at the regular income rate plus an additional 10 percent tax penalty for using the money early.

2. Early retirement is based on your age
Early distributions taken before you reach age 59½ are subject to the 10 percent tax penalty.

3. Government plans don’t usually face the penalty
Government 457 deferred compensation plans are not subject to the 10 percent penalty based on age.

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4. There are exceptions to the penalty
Under certain limited circumstances money can be removed from a retirement plan without tax penalties. According to the IRS, those situations include payments to beneficiaries after the death of the plan owner, payments due to disability, and to pay for medical expenses that exceed 10 percent of adjusted gross income for a particular year.

5. Your Social Security Check will be different
Another penalty of early retirement will come from the Social Security Administration. While it is possible to start drawing Social Security at age 62, the amount of the check could be as much as 30 percent lower than it would be for those who choose to wait. A benefit is provided to those who delay retirement until age 70.

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Uncle Sam encourages Americans to save for retirement by providing tax advantages for the money they invest. The catch is that the age at which this money can be accessed is strictly regulated. Touch it early, and there is a tax fine to pay.
retirement, early, penalty
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2015-26-12
Friday, 12 June 2015 11:26 AM
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