Early Retirement Pension Penalties

Written by steve webb
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The tax penalty for early withdrawals of funds from a pension plan is 10 per cent. Early distributions occur when you are younger than 59 1/2. This penalty is in addition to ordinary income tax that is due on any cash distribution.

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Ordinary Tax

The ordinary tax due on these distributions will depend on your income. The amount distributed will be reported to the Internal Revenue Service as current year income.

Penalty

The 10 per cent penalty is applied to the amount of the distribution; there is no withholding. It will all be due when taxes are filed.

Types

A direct rollover, even if done before 59 1/2, would avoid any taxes or penalties. Taxes and penalties apply only when taking a direct cash payment.

Significance

Remember that any withdrawal hurts your future prospects for capital accumulation due to the lost compounding.

Considerations

If possible, an early withdrawal should be avoided due to the tax penalty and immediate tax consequences.

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