Retiring Early Can Have Tax Consequences!

If you are lucky enough to be able to retire before age 55, it can hurt your tax situation. Your date of retirement, not the date you begin taking your retirement payout is the determining factor as to if you have to pay the 10% penalty on early plan payouts. (Watson, TC Summ. Op. 2011-113).

From the House Conference Report (99-841 (Vol.II)) as Cited by the Court: “In all cases, the exception applies only if the participant has attained age 55 on or before separation from service. Thus, for example, the exception does not apply to a participant who separates from service at age 52, and, pursuant to the early retirement provisions of the plan, begins receiving benefits at or after age 55.” – See more at: http://www.producersesource.com/featured-middle-right/tax-court-rules-taxpayers-distribution-does-not-meet-age-55-exception-requirements-liable-for-10-penalty-on-early-distribution/2/#sthash.nN6vE460.dpuf

So unfortunately, if you’ve retired early, or been forced to retire early due to layoff issues, it can cost you 10%. In addition, withdrawals from IRAs can’t use any of the penalty exceptions. However, remember that withdrawals from plans and IRAs after age 59 1/2 are all penalty free.

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