If a pension plan is a qualified plan under Internal Revenue Service guidelines, the money in the pension receives special tax treatment. However, you may have to pay a penalty if you withdraw it early.
In general, if you take out a pension before you reach 59 1/2 years old, your withdrawal will be considered an early withdrawal.
The IRS charges a 10 per cent early withdrawal penalty on the taxable amount of the distribution. This is a one-time fee in addition to any income taxes you owe on the withdrawal.
If you have a special exception, such as using the money to pay for medical bills that total more than 7.5 per cent of your adjusted gross income or up to £6,500 to pay for a first home purchase, you may not have to pay the 10 per cent penalty. However, you must still pay any applicable income taxes.
The IRS imposes early withdrawal penalty to prevent people from using the tax advantages of retirement accounts for purposes besides saving for retirement.
To report your early withdrawal penalty, you must complete Form 5329 and report the amount of the penalty on your Form 1040 tax return.