The California Penalty for Early IRA Distribution

by Mark Kennan

    Individual retirement arrangements were created to help you save for retirement -- not for you to tap whenever you want some extra spending money. If you live in California, you might get hit twice if you take an early withdrawal penalty. For the most part, California follows the Internal Revenue Service rules when it comes to penalizing early distributions from IRAs.

    When Penalties Apply

    The California IRA early withdrawal penalty applies to all taxable distributions taken from your account before you turn 59 1/2 years old. If you're only removing contributions from a Roth IRA, you don't owe the penalty because it's just a return of your basis. However, if you're taking a fully taxable early distribution from your IRA, you're stuck paying both the federal early withdrawal penalty and the California early withdrawal penalty on the entire amount.

    Penalty Amount

    The California IRA early withdrawal penalty isn't nearly as harsh as the IRS penalty. Instead of charging you 10 percent, California only hits your early IRA distribution with a 2.5 percent penalty. For example, if you take a $5,000 early IRA withdrawal, you owe $125 in penalties to California. If you're taking an early distribution from a savings incentive match plan for employees, or SIMPLE IRA, within the first two years of starting the account, the penalty jumps to 6 percent.

    Exceptions

    You also don't owe the penalty if you qualify for an exception. California uses the same list of exceptions as the IRS, which includes distributions taken after a permanent disability, or to pay expenses for medical insurance when you're unemployed, to pay higher education costs, or to use up to $10,000 for a first home. However, the exception only applies to the extent of your expenses, except when you're using the permanent disability exception.

    Tax Reporting

    If you owe the penalty -- or need to use an exception to avoid it -- you need to file Form FTB 3805P with your state income tax return. The amount of your distribution goes on line 1 and the amount of your exception, if any, goes on line 2. If you're claiming an exception, you must enter the exception code next to line 2 so the California Franchise Tax Board knows why you're claiming you're exempt.

    Photo Credits

    • Thinkstock/Comstock/Getty Images

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

    Zacks Investment Research

    is an A+ Rated BBB

    Accredited Business.