What are the tax consequences if I take a refund of my retirement contributions prior to age 59?
Your contributions and all of the interest you receive from your account are subject to federal income tax (with the exception of any contributions made prior to January 12, 1988 which were already taxed). When processing a refund of retirement contributions, the retirement office is required to withhold 20 percent of the taxable portion of your refund for federal tax. The 20 percent tax payment is required only if the refund is made directly to the member. You may also be subject to an additional 10% IRS penalty if you are younger than 59 1/2. To defer taxation, you must make a direct rollover of your retirement funds to an Individual Retirement Account (IRA) or another type of retirement account with a financial institution. With a direct rollover no tax is withheld and the entire taxable portion of your refund is transferred. If you have both taxable and nontaxable contributions, you may accept receipt of the nontaxable portion of your refund with no tax consequence and the taxable
