5.6- Additional Tax on Early Distributions from Traditional and Roth IRA's

To discourage the use of IRA distributions for purposes other than retirement, you'll be assessed a 10% additional tax on early distributions from traditional and Roth IRAs, unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59½. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It's in addition to any regular income tax on that amount.

Exceptions to the 10% Additional Tax

Distributions that you roll over or transfer to another IRA or qualified retirement plan aren't subject to this 10% additional tax. This is true as long as you follow the one IRA-to-IRA rollover per year rule. For more information on rollovers, refer to Topic No. 413, Rollovers from Retirement Plans and visit Do I Need to Report the Transfer or Rollover of an IRA or Retirement Plan on My Tax Return?

Exceptions to the 10% additional tax apply to an early distribution from a traditional or Roth IRA that is:

• Made to a beneficiary or estate on account of the IRA owner's death

• Made because you're totally and permanently disabled

• 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

• Not in excess of $10,000 used in a qualified first-time home purchase

• Not in excess of your qualified higher education expenses

• Not in excess of certain health insurance premiums after you have received unemployment compensation for 12 consecutive weeks (or would have been eligible to receive unemployment compensation but for your self-employed status)

• Not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income

• Made directly to the government to satisfy an IRS levy of the IRA under section 6331 of the Code

• A qualified reservist distribution

• Excepted from the additional income tax by federal legislation relating to certain emergencies and disasters

• Not in excess of $5,000 and the distribution is a qualified birth or adoption distribution

Refer to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) for more information on these exceptions and on IRA distributions generally.

Other exceptions apply to distributions from other qualified employee retirement plans. For information on these exceptions, refer to Topic No. 558 or Publication 575, Pension and Annuity Income.

Reporting the 10% Additional Tax

The 10% additional tax is reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts and Schedule 2 (Form 1040), Additional Taxes PDFPDF. However, you don't have to file Form 5329 if your Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. shows distribution code 1 in Box 7. In this instance, you need only enter the 10% additional tax directly on Schedule 2 (Form 1040). If you qualify for one of the exceptions to the 10% additional tax, but your Form 1099-R doesn't 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 and Schedule 2 to claim the exception.

Tax Withholding and Estimated Tax

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