A retirement account holder may take an early retirement plan distribution before he is 59 1/2 years old. The IRS charges a 10 percent early distribution penalty in addition to federal income taxes. Although some states do not charge income taxes, Minnesota taxes do apply to early retirement plan distributions and are payable at the time of the withdrawal or when filing a tax return.
Minnesota Income Tax
An individual must pay income taxes when he takes an early retirement plan distribution. Minnesota charges between 5.35 and 7.85 percent depending on an individual's income and whether his tax status is single or filing separately or jointly if married. Minnesota does not charge a penalty on early retirement plan withdrawals. A tax accountant can help calculate an exact amount of taxes that a beneficiary may want to set aside to pay when filing a tax return. A distribution may put a taxpayer into a higher income bracket as it increases his income for that year.
Traditional IRA WIthdrawal
Account holders make tax-free contributions to traditional IRAs. Most IRA accounts allow early withdrawal of funds before a beneficiary reaches the retirement age of 59 1/2. If a contributor takes an early distribution from a traditional IRA, he may have to pay a penalty, and federal and state income taxes. Minnesota residents must pay income tax on contributions and earnings.
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Roth IRAs are different from traditional IRAs. Contributions go into Roth IRAs after taxes, therefore any distributions are tax-free. However, Minnesota charges income taxes on earnings when withdrawn. Also, an early distribution penalty of 10 percent may apply. An account holder may take a tax-free distribution from a Roth IRA by meeting the five-year holding requirement and waiting until after age 59 1/2. Federal and state taxes do not apply to an early distribution that results from a beneficiary's death, disability or a first-time home purchase.
401(k) Retirement Plans
Federal and Minnesota income taxes apply to all 401(k) distributions. Some 401(k) plans may have early withdrawal penalties as high as 25 percent. Retirement plans may offer penalty-free withdrawals to buy a primary residence, to pay medical bills, to cover college tuition for the beneficiary or his dependents. While a penalty may be waived, state taxes still apply.