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When early retirement plan withdrawals are penalty free

Saving is the key to the kind of retirement you want. The earlier you start, the better.

FinCon16 goals board
Among the goals posted during this year's FinCon, an annual gathering of creators (including me!) of various personal finance material and advice, is to, as a couple of participants noted, retire soon. Retirement savings that receive special tax code treatment can help folks put away money for their post-work years.

In fact, a recent survey by Harris Poll for Scottrade found that nearly half of investors (46 percent) wish they had started saving earlier.

More than a third (38 percent) wish they had invested more regularly.

Tax help for retirement savers:The Internal Revenue Code is chock full of ways to encourage us to save for retirement.

There are Roth individual retirement arrangements where you can stash money on which you've already paid tax. When you take your contributions and subsequent earnings out in retirement, that money is tax-free.

There also are a variety of tax-deferred retirement accounts, such as traditional IRAs and company-sponsored defined contribution plans like 401(k)s for private sector workers and 403(b) plans for public teachers and nonprofit organization employees.

In these plans, money goes into the accounts before taxes are taken out. That can help lower your current tax bill and in some cases the IRA contributions are tax deductible.

When you withdraw money in retirement from your tax-deferred plans, you owe tax at your ordinary income tax rate on the amounts.

Early withdrawal penalties … or not: And if you take the money out early, which is before you turn 59½ according to the tax calendar, you also might owe an added 10 percent penalty on the amount.

However, in some cases, you can get your hands on your tax-deferred retirement money and not owe the penalty. Some of the most common penalty-free early distribution options are discussed in this week's Weekly Tax Tip.

The Internal Revenue Service also has a comprehensive table, part of which is excerpted below, that details all of the exceptions to the 10 percent early distributions tax penalty.

IRS table_Exceptions to Early Distribution Tax1a IRS table_Exceptions to Early Distribution Tax2a IRS table_Exceptions to Early Distribution Tax3a

Last money resort: Even if you won't face the 10 percent early withdrawal penalty, if you can find another source for the money you need, use it.

It's better to leave your retirement savings for their designated purpose. By withdrawing the cash, even penalty-free, you'll lose all those compounded earnings.

And remember, while you might escape the penalty, you'll still owe tax on the early distribution amount.

You also might find these items of interest:

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