5.7- Additional Tax on Early Distributions from Retirement plans other than IRA's

To discourage the use of retirement funds for purposes other than normal retirement, the law imposes a 10% additional tax on certain early distributions from certain retirement plans. The additional tax is equal to 10% of the portion of the distribution that's includible in gross income. Generally, early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59½. The term qualified retirement plan means:

• A qualified employee plan under section 401(a), such as a section 401(k) plan

• A qualified employee annuity plan under section 403(a)

• A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or

• An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs)

In general, an eligible state or local government section 457 deferred compensation plan isn't a qualified retirement plan and any distribution from such plan isn't subject to the 10% additional tax on early distributions. However, any distribution attributable to amounts the section 457 plan received in a direct transfer or rollover from one of the qualified retirement plans listed above would be subject to the 10% additional tax.

Exceptions to the 10% Additional Tax

Distributions that aren't taxable, such as distributions that you roll over to another qualified retirement plan, aren't subject to this 10% additional tax. For more information on rollovers, refer to Topic No. 413 and visit Do I Need to Report the Transfer or Rollover of an IRA or Retirement Plan on My Tax Return?

There are certain exceptions to this 10% additional tax. The exceptions below apply to distributions from a qualified plan other than an IRA. For a complete list, look at the Appendix for Notice 2020-62PDF.

• Distributions made to your beneficiary or estate on or after your death.

• Distributions made because you're totally and permanently disabled.

• Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.

• Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income whether or not you itemize your deductions for the year. For more information on medical expenses, refer to Topic No. 502.

• Distributions made due to an IRS levy of the plan under section 6331.

• Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.

• Distributions that are excepted from the additional income tax by federal legislation relating to certain emergencies and disasters.

• Distributions up to $5,000 made to you from a defined contribution plan or an IRA if the distribution is a qualified birth or adoption distribution.

• Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental benefit plan, as defined in section 414(d) if you were a qualified public safety employee (federal state or local government) who separated from service in or after the year you reached age 50.

• Distributions made to an alternate payee under a qualified domestic relations order.

• Distributions of dividends from employee stock ownership plans.

Refer to Topic No. 557 for information on the tax on early distributions from IRAs. For more information, refer to Publication 575, Pension and Annuity Income and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Reporting the 10% Additional Tax

Report the 10% additional tax on Schedule 2 (Form 1040), Additional TaxesPDF and attach to your Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. You must also file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts if:

1. Your distribution is subject to the tax and distribution code 1 isn't shown in the appropriate box of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or

2. One of the exceptions applies but the box labeled "Distribution Code(s)" doesn't show a distribution code 2, 3, or 4. On the other hand, you don't need to file Form 5329 if your distribution is subject to the 10% additional tax and a distribution code 1 shows in the appropriate box. In this case, enter the 10% additional tax on line 8 of Schedule 2 (Form 1040), Additional TaxesPDF and write "No" on the dotted line next to that line.

Tax Withholding and Estimated Tax

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 withholding and estimated tax payments, refer to Publication 505, Tax Withholding and Estimated Tax.