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Early Pension Distributions

How much does it really cost?

Generally, retirement funds aren’t taxed until you receive distributions. If you draw on your pension before age 59½, a ten-percent penalty for early withdrawal may apply. In addition, the state you live in may assess an additional tax on the early withdrawal. Many financial institutions have their own charge for not leaving the money with them for long enough. Plus, you must include the full amount of the distribution in your income. In some cases, those who withdraw money early lose almost 50 percent of the amount in tax and penalties. Payers are required to withhold 20 percent of the amount withdrawn for federal income tax. There are a few exceptions to the early withdrawal rule for such things as disability or death. A job lay-off is not an exception, however.

If you will be receiving money from your pension or retirement plan, visit with your tax professional first. There may be a way to minimize, defer, or even avoid paying taxes or penalties.

Related IRS Publications: 575