The 10% Early Distribution Penalty

Taking money out of a tax-deferred retirement plan before age 59 1/2 can result in a 10% penalty of the amount distributed.

There are a number of exceptions allowing early distributions without incurring a penalty. For example:

  • A qualified corporate or Keogh plan
  • Qualified annuity plan
  • Tax-sheltered annuity plan
  • IRA

SIMPLE-IRA distributions before age 59 1/2

If a distribution is made from a SIMPE-IRA to a participant before age 59 1/2 in the first two years of plan participation, a 25% penalty will be assessed on the distribution.

This penalty generally does not apply to Section 457 government plans of tax-exempt employers or state or local governments. However, if a rollover is made to a governmental Section 457 plan, where the funds came from a qualified plan, a 403(b) annuity, or an IRA, then a penalty may apply to a later distribution from the Section 457 to the extent of the rollover.

Reporting Early Distribution Penalties

If you received a distribution before age 59 1/2, and do not qualify for a penalty exception, and Code 1 is shown in Box 7 of your Form 1099-R then, do the following:

  • Multiply the taxable amount of the distribution by 10%.
  • Enter the amount of the penalty on Line 60 of Form 1040.
  • Write "No" next to Line 60 to indicate that Form 5329 does not have to be filed. If you are subject to the penalty and Code 1 is not entered in Box 7 of Form 1099-R, you must file Form 5329.
    • You may also have to file Form 5329 to claim a penalty exception. However, filing Form 5239 is not required if you qualify for the rollover exception or you qualify for another exception that is correctly coded in Box 7 of Form 1099-R.

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