How to Calculate Early Withdrawal Tax Penalty for Massachusett's State Retirement

If you retire early in Massachusetts, you may face a penalty tax.

If you retire early in Massachusetts, you may face a penalty tax.

If you're an employee of the Commonwealth of Massachusetts, you're required to make contributions to the state retirement plan. Once you retire, you'll receive monthly payouts for the rest of your life. According to the terms of the plan, you'll qualify for retirement benefits after 20 years of service, or at age 55 with 10 years of service. If you leave the plan and want to take your money out, you'll face taxation and penalties. While some states may charge additional early withdrawal penalties, Massachusetts is not among them. You'll only have to pay the federal early withdrawal penalty.

Choose whether or not you want to roll over your distribution. If you have your plan administrator directly transfer your Massachusetts retirement funds to another retirement plan, such as an individual retirement account, you can usually avoid taxes, including the early withdrawal penalty. If you take a direct distribution of your funds, the plan administrator will withhold 20 percent for taxes. You may be liable for additional taxes or penalties when you file your income tax return.

Review your Form 1099-R. When you take a withdrawal from any retirement plan, including the Massachusetts retirement plan, you'll receive a Form 1099-R from the plan administrator. Form 1099-R lists the amount and type of your distribution, including whether the withdrawal was premature. Verify that this information is correct. The IRS will also get a copy of your 1099-R, so you can't avoid paying the required taxes and penalties on a distribution.

Transfer the amount of your withdrawal to Form 5329. If completed correctly, your 1099-R should show the same amount in boxes 1 and 2, which list your gross distribution and your taxable distribution, respectively. Copy that amount to line 1 of Form 5329.

Indicate on Form 5329 the amount of your withdrawal that was made due to an IRS-approved exception, if applicable. The IRS doesn't charge early withdrawal penalties on certain distributions, such as those due to disability. If an exception is granted, box 7 of your 1099-R will indicate code 2. Enter any exception amounts on line 2 of Form 5329.

Subtract line 2 from line 1 on Form 5329. This will give you the amount of your withdrawal that is liable for the penalty tax. Enter that total on line 3.

Multiply your line 3 total on Form 5329 by 10 percent. Enter the amount on line 4. The IRS tax on early distributions is 10 percent. Massachusetts does not assess an additional tax, so the amount on line 4 is your total penalty tax due.

Transfer your penalty tax amount to Form 1040. Your penalty tax goes on line 58 of your 1040, or line 56 if you file Form 1040NR.


About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

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