Tax Audit Red Flags
Taking an Early Payout from an IRA or 401(k) Account
The IRS wants to be sure that owners of traditional IRAs and
participants in 401(k)s and other workplace retirement plans are properly
reporting and paying tax on distributions. Special attention is being given to
payouts before age 59½, which, unless an exception applies, are subject to a
10% penalty on top of the regular income tax. An IRS sampling found that nearly
40% of individuals scrutinized made errors on their income tax returns with
respect to retirement payouts, with most of the mistakes coming from taxpayers
who didn’t qualify for an exception to the 10% additional tax on early
distributions. So the IRS will be looking at this issue closely.
The IRS has a chart listing withdrawals taken before the
age of 59½ that escape the 10% penalty, such as payouts made to cover very
large medical costs, total and permanent disability of the account owner, or a
series of substantially equal payments that run for the longer of five years or
until age 59½.
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