Most people won't take money out of an Individual Retirement Account early for one simple reason: If you do it before you're 59 1/2, it's subject to income tax and early distribution penalties. However, emergencies do happen, and sometimes you just need the money.
The next hurdle will be your taxes. The Internal Revenue Service expects to see that withdrawal on your forms for the year, and if it's not there, you'll have even more penalties.
If you don't report early IRA withdrawals to the IRS in a timely manner, you can expect to pay additional penalties.
Taking a Hardship Distribution
With most retirement plans, early withdrawal is not an option unless there is an extreme circumstance meriting it. Often this is done in the form of something called a hardship distribution. Not all retirement plans have this option built in, and even in those that do, you'll likely need to prove to your employer that you have an immediate and heavy financial need. When this happens, you have an obligation to report the withdrawal to the IRS and pay any associated taxes on the funds.
Your Obligation to Report Withdrawals
The Internal Revenue Code specifies that taxable early withdrawals from an IRA must be reported on Form 1040, lines 4a and 4b. Early distributions from IRAs are reported to both the individual and the Internal Revenue Service by the IRA plan administrator in either box 1 or box 2 of Form 1099-R.
A federal income tax of 10 percent is applied to the early distribution unless you choose not to be taxed at the time of the withdrawal. This additional tax must be reported on line 59 of Schedule 4, before ultimately transferring to Form 1040 on line 14.
IRS Notification With Form 1099-R
The IRS gets Form 1099-R from your IRA plan administrator, so you can be sure it knows about the early distribution. Accordingly, IRS computer verification will discover the discrepancy in your tax filing. In many cases, the IRS may audit your return or otherwise notify you of the omission.
Making an Amended Return
Once you realize you've made this mistake, you'll need to send in a correction using Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X must be filed within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
Hardship Distribution Exception
One exception to early withdrawal penalties is the hardship distribution. Some retirement plans have this option built in, but you'll need to prove to your employer that you have an immediate and heavy financial need. In this case, you may still pay the 10 percent penalty and will need to report it to the IRS
Additional IRS Penalties
When you forget to report income of any kind, the IRS can and will penalize you. It charges late fees and interest on the additional tax amounts you didn't pay on time. The IRS can also impose an accuracy penalty for errors in your calculation if it finds you were negligent, disregarded the regulation or substantially understated your income.
- IRS Penalties for Underwithholding
- How to File a 1099
- What Will Happen if I Forgot to File a 1099R?
- How to Report the Rollover of a 401(k) to a Traditional IRA on a 1040
- How to Close a SEP IRA
- IRS Questions & Answers About Cashing in a 401(k)
- How to Transfer a Tax Sheltered Annuity 403(b) to a Traditional IRA
- IRS Rules for a 457 Rollover to a Roth IRA