Tax on Early Distributions from Traditional and Roth IRAs

History:

To discourage the use of IRAs for purposes other than retirement, the law imposes a 10% additional tax on early distributions from both traditional and Roth IRAs unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59 1/2.

Distributions that you roll over or transfer to another IRA or qualified retirement plan are not subject to this 10% additional tax.

There are exceptions to this 10% additional tax for early distributions that are:

1. made to a beneficiary or estate on account of the IRA owner’s death
2. made on account of disability
3. made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
4. made to pay for a qualified first-time home purchase
5. not in excess of your qualified higher education expenses
6. not in excess of certain medical insurance premiums paid while unemployed
7. not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
8. due to an IRS levy, or
9. a qualified reservist distribution

Refer to Publication 590, Individual Retirement Arrangements, for more information on these exceptions.

Other exceptions apply to distributions from other qualified employee retirement plans. For information on these exceptions, refer to Topic 558, or to Publication 575.

The 10% additional tax is reported on Form 5329 (PDF). However, you do not have to file Form 5329 if your Form 1099-R (PDF) shows distribution code “1” or “J” in Box 7.

In this instance, you need only enter the 10% additional tax on the appropriate line of your Form 1040 (PDF). If you meet one of the exceptions to the tax, and your Form 1099-R does not have a distribution code “2”, “3”, or “4” in the box labeled “distribution code(s)”, or if the code shown is incorrect, you must file Form 5329 to claim the exception.

Federal income tax withholding is required for distributions from IRAs unless you elect out of withholding on the distribution. However, if you elect out of withholding, you may have to make estimated tax payments. For more information on estimated tax payments, refer to Publication 505, Tax Withholding and Estimated Tax.

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