To keep retirement savings for retirement, the IRS generally charges a 10% additional tax on early distributions from IRAs. Early distributions are those taken before age 59½. This penalty applies to the taxable portion of your early withdrawal, on top of your regular income tax.
Exceptions to the 10% Additional Tax
Good news! There are many situations where you can avoid the 10% penalty. Here's a breakdown:
Rollovers: Moving your money from one IRA to another, or to a qualified retirement plan, is penalty-free, as long as you follow the one IRA-to-IRA rollover per year rule.
Medical Expenses: If your withdrawal doesn't exceed your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income, you may qualify for an exception.
Health Insurance Premiums: Paying for health insurance premiums after receiving unemployment compensation (or if you would have been eligible but for your self-employment status) can be an exception.
Disability: If you're totally and permanently disabled, early withdrawals may be exempt.
Terminal Illness: Withdrawals made to you because you are terminally ill are exempt.
Death: Distributions to your beneficiary or estate after your death are not penalized.
Substantially Equal Periodic Payments: Taking a series of substantially equal periodic payments based on your life expectancy (or the joint life expectancies of you and your beneficiary) can avoid the penalty. See Notice 2022-6 for details.
Higher Education Expenses: Using the money for qualified higher education expenses can be an exception.
First-Time Home Purchase: You can withdraw up to $10,000 for a qualified first-time home purchase without penalty.
IRS Levy: If the distribution is made directly to the government to satisfy an IRS levy under section 6331 of the Code, it's penalty-free.
Qualified Reservist Distribution: Certain distributions to qualified reservists called to active duty may be exempt.
Birth or Adoption: You can withdraw up to $5,000 for qualified birth or adoption expenses.
Domestic Abuse: Distributions made to a victim of domestic abuse by a spouse or domestic partner (applies to distributions made after 12/31/2023)
Federally Declared Disaster: Distributions made to qualified individuals who sustain an economic loss by reason of a federally declared disaster where they live
Personal or Family Emergency Expenses: Distributions made for personal or family emergency expenses (applies to distributions made after 12/31/2023)
Emergency and Disaster Relief: Distributions excepted from the additional income tax by federal legislation relating to certain emergencies and disasters
Corrective Distributions: Made to you as a corrective distribution, including a returned IRA contribution(s) that is withdrawn by the filing due date (including extensions), not including earnings on these returned contributions
SIMPLE IRAs and SARSEPs with Automatic Enrollment Features: Distributions that are permissible withdrawals from SIMPLE IRAs and SARSEPs with automatic enrollment features.
For more detailed information on these exceptions, check out Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
Keep in mind that other exceptions might apply to distributions from other qualified employee retirement plans. See Topic no. 558 or Publication 575, Pension and Annuity Income for details.
Reporting the 10% Additional Tax
You'll typically report the 10% additional tax on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts and Schedule 2 (Form 1040), Additional Taxes PDF.
However, if Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. shows distribution code 1 in Box 7, you might not need to file Form 5329. Instead, enter the tax directly on Schedule 2 (Form 1040) and check the box indicating you're not liable to file Form 5329.
If you qualify for an exception, but your Form 1099-R doesn't show the correct exception code, you'll need to file Form 5329 and Schedule 2 to claim it.
Tax Withholding and Estimated Tax
Remember, federal income tax withholding is usually required for IRA distributions unless you opt out. If you choose to opt out, you might need to make estimated tax payments. Publication 505, Tax Withholding and Estimated Tax, has all the details.