>In the U.S., lots of tax advantaged accounts have withdrawal penalties.
What's the penalty?
Lots of people think that of tax-free retirement savings (and people keep warning me of it) but in fact, the only penalty I've ever heard of is you must pay tax on that money along with other income.. so if you do it in a regular earning year, you pay lots of income tax. Do it in a year when you earn nothing else, and you pay none or very little. That's not a penalty
Let's say I don't earn any other income in a year and pull out $5k. What's my tax rate?
Let's say I pull out exactly the tax-free threshold. What's my tax rate?
(I ask for the clarification because here in Canada, they withhold a very large amount of whatever you take out.. because they are assuming you have other income. It all comes back at tax time though, based on whatever other income you do have. So I ask because I'm wondering if they force the 10% on you, or if they just withhold it and you can get it back at tax time)
It is an additional 10% tax above whatever other taxes you would owe on that money. I'm not an expert, it isn't obscure, you're better off searching if you still don't believe me. Try "401k early withdrawal penalty".
A quick google shows it's 10% more tax than you would have paid, when included with your other income.
If this withdrawal is your only income, and you keep the withdrawal below the tax-free limit (looks to be $9k), you won't pay any tax, and thus won't pay the 10% penalty either.
Line 58 is in the 'Other taxes' section of the form, where the amounts are figured using some basis other than the AGI. It also is where you would look in the 1040 instructions to see how the penalty is calculated.
What's the penalty?
Lots of people think that of tax-free retirement savings (and people keep warning me of it) but in fact, the only penalty I've ever heard of is you must pay tax on that money along with other income.. so if you do it in a regular earning year, you pay lots of income tax. Do it in a year when you earn nothing else, and you pay none or very little. That's not a penalty