|Tax Topic #558
||2008 Tax Year
Topic 558 - Tax on Early Distributions from Retirement Plans
To discourage the use of pension funds for purposes other than normal retirement,
the law imposes an additional 10% tax on certain early distributions of these
funds. Early distributions are those you receive from a qualified retirement
plan or deferred annuity contract before reaching age 59 1/2. The term "qualified
retirement plan" means:
- A qualified employee plan such as a 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 eligible state or local government section 457 deferred compensation
plan (to the extent that any distribution is attributable to amounts the plan
received in a direct transfer or rollover from one of the other plans listed
here or an IRA)
Distributions that are not taxable such as distributions that you roll
over to another qualified retirement plan, or a distribution of your designated
Roth contributions are not subject to this 10% tax. For more information on
rollovers, refer to Topic 413.
There are certain exceptions to this penalty. The following six exceptions
apply to distributions from any qualified retirement plan:
- Distributions made to your beneficiary or estate on or after your death.
- Distributions made because you are totally and permanently disabled.
- Distributions made as part of a series of substantially equal periodic
payments over the life expectancy of the owner or life expectancies of the
owner and the 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 that are equal to or less than your deductible medical expenses,
that is, the amount of your medical expenses that is more than 7.5% of your
adjusted gross income. You do not have to itemize to meet this exception.
For more information on medical expenses, refer to Topic 502.
- Distributions made due to an IRS levy of the plan.
- Distributions to qualified reservists. Generally, these are distributions
to individuals called to active duty after September 11, 2001 (See section
107 of the Heroes Earnings Assistance and Relief Act of 2008 ("HEART" H. R.
6081), section 72(t)(2)(G) is amended striking this phrase. The amendment
made by section 107 shall apply to individuals ordered or called to active
duty on or after December 31, 2007.)
The following additional exceptions apply only to distributions from a
qualified retirement plan other than an IRA:
- 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
from qualified governmental plans if you were a public safety employee who
separated from service after you reached age 50),
- Distributions made to an alternate payee under a qualified domestic relations
- Distributions of dividends from employee stock ownership plans.
Refer to Topic 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, Individual
Retirement Arrangements (IRAs).
The 10% tax is reported on the appropriate line of Form 1040 (PDF) . You must also file Form 5329 (PDF), Additional
Taxes on Qualified Plans (Including IRA's) and other Tax-Favored Accounts,
- Your distribution is subject to the tax, and distribution code "1" is
not shown in the appropriate box of Form 1099-R (PDF),
- One of the exceptions applies but the box labeled "Distribution Code(s)"
does not show a distribution code of "2", "3", or "4". On the other hand,
you do not need to file Form 5329 if your distribution is subject to the tax
and a distribution code of "1" shows in the appropriate box. In this case
enter the 10% tax on the appropriate line of Form 1040 and write "no" on the
dotted line next to the appropriate line.
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 estimated tax payments, refer to Publication 505, Tax Withholding and Estimated Tax.
Page Last Reviewed or Updated: December 22, 2008
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