Your Retirement Account Is Not A Savings Account

Taking distributions from your retirement accounts before age 59 1/2 can have harsh tax consequences. If the distribution is a premature withdrawal, then you owe regular income tax and a 10% penalty. State income taxes and additional penalties can be piled on top of this. If you are in the 25% regular income tax bracket plus the 10% penalty then add 7% Arkansas income tax plus a 1% penalty. That's 43% of your retirement funds going to taxes. Quite a price to pay! You may be in a lower or higher bracket or not pay state income tax but I think you can see you need to get the facts before you request the money. There are 12 exceptions to the 10% penalty so you may qualify to avoid the penalty. What I see on a regular basis is that the money is withdrawn and we start to prepare the tax return. The taxpayer says they held the tax out so I should be ok. Well the tax withheld is normally 10% or 20%. Neither amount is sufficient to cover the tax due and you get much lower refund or owe the IRS money. If you leave a job consider rolling over the retirement account to an IRA instead of just cashing it in or if you need money at least give us a chance to determine the tax cost before you request the funds. The tax cost is often far higher than you expect and makes a premature retirement withdrawal a bad financial move.

Robby 
Selph & Friday CPA
Phone: 903-792-0281
www.selphandfridaycpa.com
Email: rselphcpa@cableone.net

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