3. Excess contribution removal, before tax deadline
4. Excess contribution removal, after tax deadline
Premature withdrawals, or early distributions, from an Individual Retirement Account (IRA) occur prior to the age of 59½ and may be subject to taxes and penalties.
Traditional, SEP, SIMPLE IRAs
If you are considering a withdrawal from these types of IRAs before the age of 59½, it will be considered an early distribution by the IRS.
There may be a 10% penalty unless the withdrawal qualifies as an exception. A 25% penalty may apply if you take a distribution from a SIMPLE IRA within the first 2 years of opening the account.
If you are considering withdrawing from your Roth IRA, you may remove your original contributions without penalty. For example, if you have contributed $6,000, and it's grown to $8,000, you can make a premature $6,000 withdrawal without taxes and penalties, but not the $2,000 in earnings.
If you want to remove the earnings, you may be subject to a 10% tax.
A normal distribution is a withdrawal taken from a Traditional IRA account after one reaches the age of 59½. For a Roth IRA, you can withdraw penalty free when you reach the age of 59½ and the account has been open for at least 5 years.
Once one reaches 72 (73 if you reach age 72 after Dec. 31, 2022)* years old, there are required minimum distributions for Traditional IRAs, SEP IRAs, and SIMPLE IRAs. If you fail to withdraw money from an IRA after reaching the specified age, then you may be subject to tax penalties.
*If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. If you reach age 73 in 2023, you were 72 in 2022 and subject to the age 72 RMD rule in effect for 2022. If you reach age 72 in 2022,
- Your first RMD is due by April 1, 2023, based on your account balance on December 31, 2021, and
Your second RMD is due by December 31, 2023, based on your account balance on December 31, 2022.
Excess contribution removal, before tax deadline
The excess IRA contribution amount, plus earnings or losses, will need to be removed by the tax filing deadline (generally April 15), including an automatic six-month extension (generally October 15th).
If you remove the excess contribution after you file your taxes, you may need to file an amended tax return. If you remove the excess in a timely manner, you will owe tax and, if under age 59½, the IRS 10% additional tax for early or pre-59½ distributions (10% additional tax) on any earnings, not on the excess contribution.
Excess contribution removal, after tax deadline
Only the true excess contribution, not a nondeductible contribution, can be removed after the deadline. You may remove only the amount of the excess, not any gains or losses.
You will owe the IRS 6% excise tax for every year the excess remains in the IRA.
The early distribution penalty only continues through your lifetime. After your death, your beneficiaries can take early withdrawals from your IRA without incurring the extra 10%.
Disability-based IRA distribution exceptions apply when an IRA owner suffers a total and permanent disability. The standards for proving you made an exempt Roth IRA early withdrawal are high. You must get a doctor to attest that your condition is indefinite, prolonged or terminal.
- The IRS will not automatically qualify you for a 72(t) tax exemption just because a disability has left you unemployed.
The definition of substantial gainful activity usually encompasses any part- or full-time work for which you earn minimum wage.
For a direct rollover distribution to another custodian, please contact us with a signed Letter of Acceptance form from the receiving custodian.
If you have further questions, please contact us.
M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.