Taking money out of your retirement account can cause unexpected tax consequences. Contributions to retirement accounts are normally funded with pre-taxed dollars. As a result, when funds are withdrawn from these accounts, they are considered taxable income.
In the event you need to take money out of your retirement accounts prior to age 59 ½, most of these accounts penalize you. This penalty is in addition to the tax on the distribution.
Most retirement accounts require individuals to take money out of their account after reaching age 72 or 70 ½ (if you turned 70 ½ prior to 2019). These Required Minimum Distributions (RMD) are considered taxable income, and in the event you forget to take the distribution, the IRS will penalize you. This penalty is in addition to the tax on the distribution.
So, what should you do? Make sure you speak with your financial advisor and accountant prior to taking a distribution from your retirement account. There are some exceptions to both the early distribution and failure to take an RMD penalties. With proper planning of your distributions, there may also be some tax strategies to reduce the tax impact of your distribution.
Click on the flowing links to read more about things you need to consider when taking distributions out of retirement accounts.
Source: Internal Revenue Service