Every tax season I see several people get clubbed to death with penalties and taxes on early distributions from their retirement plans.
Quite simply, most taxpayers do not realize (until it is too late) how severe the consequences are. Since they don't understand the severity, they don't think to ask about it.
The federal penalties alone are 10%. Many states penalize you another 3%. Then, the distribution is added to your taxable income where most, if not all of it, will be taxed at your highest marginal tax rate.
It isn't unusal to lose half of your distribution to the Tax Man. That is exactly what will happen if If you live in a high tax state like Californicate, where the 9.55% tax bracket kicks in for singles at a taxable income of $47,000.00. Add the 25% federal bracket, which starts at $34,000.00 for eligible bachelors.
Do the math with me, now:
That's a whopping 47.55% of your distribution. Factor in how much your investment dropped in the last few years and you will be drawing a hot bath and looking for some razor blades.
There are a few exceptions that will avoid the penalty, but there are no exceptions that will avoid the taxes.
Said it many times, you better be dang sure you are prepared for the tax bite before you pull your money out of any retirement plan.
As El Jeronimo says: If in doubt. Stay out.
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