What is the 10% Early Distribution Tax?
To keep retirement funds for retirement, the IRS generally charges an extra 10% tax on early distributions from retirement plans. This applies when you take money out of a qualified retirement plan before age 59½. The tax is 10% of the amount you withdraw that's included in your gross income.
A qualified retirement plan includes:
A section 401(a) qualified employee plan, such as a section 401(k) plan
A section 403(a) qualified employee annuity plan
A section 403(b) tax-sheltered annuity plan for public school or tax-exempt organization employees
A section 408(a) individual retirement account or a section 408(b) individual retirement annuity (IRAs)
Distributions from an eligible state or local government section 457 deferred compensation plan generally aren't qualified retirement plans. However, if the section 457 plan received money in a direct transfer or rollover from one of the qualified retirement plans listed above, those distributions would be subject to the 10% additional tax.
Exceptions to the Rule
Don't worry, there are exceptions! You won't pay the 10% tax if:
You roll over the distribution into another qualified retirement plan.
You receive distributions as part of a series of substantially equal periodic payments over your life expectancy (or the life expectancies of you and your beneficiary). For plans other than IRAs, you generally must separate from service with your employer before these payments begin.
You become totally and permanently disabled.
You are terminally ill.
The distribution is made to your beneficiary or estate after your death.
You leave your job after age 55.
You are a qualified public safety employee who leaves service during or after the year you turn age 50 (or have 25 years of service). This applies to governmental plans under section 414(d).
You're an employee who provides firefighting services and separated from service in or after the year you reached age 50 (or 25 years of service) from a plan described in section 402(c)(8)(B) clauses (iii), (iv), or (vi).
The distribution is made to an alternate payee (spouse or former spouse) under a qualified domestic relations order.
You have deductible medical expenses exceeding 7.5% of your adjusted gross income.
You receive distributions from an employer plan under a written election with a specific distribution schedule, and you separated from service before March 1, 1986, and began receiving payments.
The distributions are dividends from employee stock ownership plans.
The distribution is due to an IRS levy under section 6331.
The distributions are qualified reservist distributions (generally, for those called to active duty for at least 180 days after September 11, 2001).
You receive phased retirement annuity payments as a federal employee.
The distribution is up to $5,000 from a defined contribution plan for a qualified birth or adoption.
The distribution is from a pension-linked emergency savings account (for distributions after 12/31/2023).
You sustained an economic loss due to a federally declared disaster.
You are a victim of domestic abuse (for distributions after 12/31/2023).
The distribution covers personal or family emergency expenses (for distributions after 12/31/2023).
The distribution is a permissible withdrawal from a plan with automatic enrollment features.
Reporting the Tax
You'll report the 10% additional tax on Schedule 2 (Form 1040), Additional Taxes, and attach it to your Form 1040 or Form 1040-SR.
You may also need to file Form 5329, Additional Taxes on Qualified Plans, if:
Your distribution is subject to the tax and distribution code 1 isn't shown on Form 1099-R.
An exception applies, but the "Distribution Code(s)" box doesn't show an exception or the code is incorrect.
If code 1 is shown on Form 1099-R, just enter the tax on line 8 of Schedule 2 (Form 1040) and check the box indicating you don't need to file Form 5329.
Tax Withholding and Estimated Tax
Retirement plan distributions are subject to federal income tax withholding. If your distribution is subject to the 10% additional tax, your withholding may not be enough. You might need to make estimated tax payments to cover the shortfall.
Disclaimer: As an AI Chatbot, I am not qualified to provide tax advice. Consult a professional for further assistance.