Retirement Topics - Tax on Early Distributions

Generally, the amounts an individual withdraws from his or her IRA or other qualified retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax and report the amount to the IRS for any early distributions, unless an exception applies.

Exceptions: There are several exceptions to the age 59½ rule. Even if individuals receive a distribution before they are age 59½, they may not have to pay the 10% additional tax if they are in one of the following situations.

• They receive a distribution from a retirement plan (other than an IRA) after leaving a job and are age 55 (age 50 for qualified public safety employees).
• They have unreimbursed medical expenses that are more than 7.5% of their adjusted gross income.
• The distributions are not more than the cost of their medical insurance (IRA only).
• They are disabled.
• They are a beneficiary of a deceased plan participant or IRA owner.
• They are receiving distributions in the form of an annuity.
• The distributions are not more than their qualified higher education expenses (IRA only).
• They use the distributions to buy, build or rebuild a first home (IRA only, and limited to $10,000).
• The distribution is due to an IRS levy.
• The distribution is a qualified reservist distribution.
• The distribution is made to an alternate payee under a QDRO.
• They are receiving a distribution timely made to reduce excess contributions under a 401(k) plan.
• They are receiving a distribution timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
• They are receiving a distribution timely made to reduce excess elective deferrals.
• They are receiving a permissible withdrawal from an EACA.

The 10% tax is reported on the appropriate line of Form 1040. The individual may also need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Form 5329 does not need to be filed if Form 1099-R shows distribution code "1" or "J" in Box 7. In this instance, the individual need only enter the 10% tax on the appropriate line of his or her Form 1040 and write "no" on the dotted line next to the appropriate line. If the individual meets one of the exceptions to the tax, and the Form 1099–R does not indicate an exception, or if the exception shown is incorrect, he or she must file Form 5329 to claim the exception.

Early Distributions from SIMPLE IRAs:

Two-year rule. To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which an employee first participated in his or her employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. The 2-year period begins on the first day on which contributions made by the employer are deposited in the employee’s SIMPLE IRA.

After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan).

Additional Tax on Early Distributions

The additional tax on early distributions (discussed above) applies to SIMPLE IRAs. If a distribution is an early distribution and occurs during the 2-year period following the date on which the employee first participated in his or her employer's SIMPLE IRA plan, the additional tax on early distributions is increased from 10% to 25%.

If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed.

Additional Resources:

Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 575, Pension and Annuity Income
Publication 590, Individual Retirement Arrangements (IRAs)
Chart showing exceptions to the 10% additional tax
Topic 558 - Tax on Early Distributions from Retirement Plans
Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
Publication 554, Tax Guide for Seniors
Publication 970, Tax Benefits for Education