If the retirement funds are withdrawn prior to the maturity date or not withdrawn after the maturity date, there will be a premature distribution penalty and an excise penalty imposed. We will explain it with in example.

At 48 years old, "T" has taken $20,000 from her traditional IRA. "T" used $10,000 as a down payment for her second home, $3,700 for the adoption of her child, $2,300 for her employed health insurance premium, $2,500 for qualified higher education expenses, and $1,500 as a down payment for a new car. Considering an annual income of $80,000. What is the penalty for distributing the 'T' prematurely?

Taxpayer 'T' will not be charged penalties on qualified withdrawals, such as payments for adoption and qualified higher education expenses, which are not subject to a 10% penalty. Therefore, taxpayer T will pay $1,380 in penalty. $20,000 - $3,700 - $2,500 = $13,800 x 10% = $1,380.

Excise tax will be imposed if the funds are not withdrawn on the date of maturity.

If you fail to withdraw the required minimum distributions (RMDs) from your retirement accounts by age 72 (or 73, depending on the rules for your specific account). If you fail to distribute the amount, you may be charged a 50% excise tax.

If the amount you were supposed to withdraw is less than what you actually withdrew, you will be charged a penalty.

Let's say your RMD for the year is $10,000 and you only take out $5,000, the penalty will be 50% of the remaining $5,000, which is $2,500.

To avoid this significant penalty, it's crucial to calculate and withdraw the correct amount.