Early Withdrawals: The 10% Additional Tax and Its Exceptions

If you take money out of a retirement account before age 59½, you may owe an extra 10% tax. This is the additional tax on early distributions. It applies on top of your regular income tax, and only to the part of the withdrawal you must include in income. IRS: Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs

Which accounts this covers

The rule covers distributions from qualified employer plans, such as 401(k) and 403(b) plans. It also covers traditional and Roth IRAs. The IRS explains the plan rules in Topic 558 and the IRA rules in Topic 557. IRS: Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs

The basic rule

The extra tax equals 10% of the part of the distribution that you include in gross income. Money you take out that is not taxable does not get the 10% tax. A rollover to another qualified plan or IRA is also not subject to this tax, as long as you follow the IRA rollover rules.

Illustration only, with made-up numbers. Jordan is 45 and takes $10,000 from a traditional IRA. The full $10,000 is taxable, and no exception applies. The extra tax is $1,000, which is 10% of $10,000. Jordan also pays regular income tax on the $10,000.

Common exceptions

Several exceptions can remove the 10% tax. These are some of the exceptions that apply to IRAs:

• Total and permanent disability, or a terminal illness
• A distribution to a beneficiary or estate after the owner dies
• Substantially equal periodic payments over a life or life expectancy
• Qualified higher education expenses, up to the amount you spent
• Up to $10,000 used for a qualified first-time home purchase
• Up to $5,000 for a qualified birth or adoption distribution
• Unreimbursed medical expenses above the IRS limit
• Qualified disaster losses, and personal or family emergency expenses
• A corrective distribution of an excess contribution, if you withdraw it by your filing due date, including extensions

Plans other than IRAs have their own list. One example is a separation from service after age 55. For plans, Topic 558 gives the medical expense threshold as more than 7.5% of adjusted gross income. Topic 557 does not give that percentage for IRAs, so check IRS Publication 590-B for the IRA rule. IRS: Topic no. 558

A corrective distribution of an excess contribution does not cover the earnings on that money. This exception does not cover those earnings.

How the tax is reported

Your Form 1099-R shows a distribution code in Box 7. Code 1 means an early distribution with no known exception. If the distribution is subject to the 10% tax and code 1 appears in Box 7, you enter the 10% tax on line 8 of Schedule 2 (Form 1040). You do not need Form 5329 in that case. IRS: Topic no. 558, Reporting the 10% additional tax

You must file Form 5329 if code 1 is missing from Box 7 for a distribution that is subject to the tax. You must also file it if an exception applies but the code box does not show it, or shows the wrong code. IRS: Topic no. 557

Steps to take

1. Check your age on the date of each withdrawal.
2. Find the taxable part of each distribution. Use your Form 1099-R.
3. Check whether an exception applies, and keep the proof for it.
4. Read the distribution code in Box 7 of Form 1099-R.
5. Enter the 10% tax on Schedule 2, or file Form 5329 if a code is missing or wrong.

Keep your account statements, your Form 1099-R, and any records that support an exception, such as medical bills or home purchase papers.

General information, not advice about your return.

Sources: Sources: IRS, Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs (https://www.irs.gov/taxtopics/tc558); IRS, Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs (https://www.irs.gov/taxtopics/tc557) This is general information, not advice about your specific return.

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