The IRS may impose an early withdrawal penalty to discourage taxpayers from using their pension funds for other than normal retirement purposes. If a taxpayer takes a distribution, before age 59½, from a qualified retirement plan or deferred annuity contract it may be considered an “early” distribution. The penalty is usually an additional 10% tax.
The term "qualified retirement plan" means:
- A qualified employee plan such as a 401(k) plan,
- A qualified employee annuity plan,
- A tax–sheltered annuity plan for employees of public schools or tax–exempt organizations,
- An IRA other than an education IRA, or
- If you have an early distribution from a SIMPLE IRA plan within the first 2 years of participation in the plan, the additional tax is 25%.
While an eligible State or local government section 457 deferred compensation plan is not a qualified retirement plan, any distribution attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here would be subject to the 10% additional tax.
Not all distributions are taxable, such as distributions that are rolled over to another qualified retirement plan or a distribution of your designated Roth IRA contributions are not subject to this 10% additional tax.
EXCEPTIONS: Per the IRS, “there are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.”
- you have unreimbursed medical expenses (>7.5% Adjusted Gross Income; after 2012, 10% if under age 65)
- the distributions are not more than the cost of your medical insurance
- you are disabled
- you are the beneficiary of a deceased IRA owner
- you are receiving distributions in the form of an annuity
- the distributions are not more than your qualified higher education expenses
- you use the distributions to buy, build or rebuild a first home
- the distribution is due to an IRS levy of the qualified plan
- the distribution is a qualified reservist distribution.
If any of the above exceptions apply to your early withdrawal that you are reporting, go to:
- Federal Section
- Other Taxes
- Tax on Early Distribution Form 5329
Enter the amount that is exempt in the field for "Early Distributions that are not subject to 10% tax" under Part 1 and select the reason from the drop-down menu for the field "Select the reason for exemption".