To discourage the use of deferred qualified retirement funds for purposes other than normal retirement, the law imposes an additional 10% tax on certain early distributions of these funds. Early distributions are those you receive from a qualified retirement plan before reaching age 59½. The term qualified retirement plan means:

• A qualified employee retirement plan such as a 401(k),
• A qualified annuity plan,
• A tax-sheltered annuity plan for employees of public schools or tax-exempt organizations,
• An IRA including a Simple IRA.

Distributions that you roll over to another qualified retirement plan are not subject to this 10% tax. For more information on rollovers, see Topic 413.

There are certain exceptions to this penalty. Four of these exceptions apply to distributions from either a qualified retirement plan or an IRA. They are:

• Distributions made to your beneficiary or estate on or after your death,
• Distributions made because you are totally and permanently disabled,
• Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiaries. If these distributions are from a qualified employee plan, you must separate from service with this employer before the payments begin for this exception to apply, and
• Distributions that are equal to or less than the amount of deductible medical expenses, that is, the amount of your medical expenses that are more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.

For more information on medical expenses see Topic 502.

The following additional exceptions apply only to distributions from a qualified employee retirement or annuity plan:

1. Distributions made to you after you separated from service with your employer, if the separation occurred after you reached age 55.
2. Distributions made under qualified domestic relations orders (QDROs).

The following exceptions apply only to IRAs:

1. Distributions made to pay for certain qualified higher education expenses.
2. Distributions made to pay for first-time homebuyers. These exceptions do not apply to qualified employee retirement or annuity plans.

See Topic 557, Pension and Annuity, for information on the tax on early distributions from IRAs. The 10% tax is reported on Form 5329 and Form 1040 line 53. Form 5329 is required if one of the exceptions is met and Form 1099-R shows a distribution code of "1". Form 5329 is not required if Box 7 shows distribution codes of "2", "3", or "4" or there are no exceptions, and Box 7 shows a distribution code of "1". In this case enter the 10% tax on line 53 of Form 1040 and write "no" on the dotted line next to line 53.

If you have a distribution from a Simple IRA, an additional penalty may apply. Please see Publication 560, Retirement Plans for Small Business.

Distributions from a qualified retirement plan are subject to federal income tax withholding; however, if your distribution is subject to the 10% additional tax, your withholding may not be enough. You may have to make estimated tax payments. For more information on estimated tax payments, see Topic 355, or Publication 505, Tax Withholding and Estimated Tax. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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