CARL WATTS & ASSOCIATES

September 29, 2014

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Early Distributions from
Retirement Plans
If you are enrolled in a retirement plan or contribute to an IRA, then you probably know about the tax advantages of retirement plans and the specific requirements from the Internal Revenue Code.

One of these requirements is that you make no withdrawals from a qualified retirement plan before you reach the age of 591/2.

In general, an early distribution, or early withdrawal, is any money you take out of a qualified retirement plan before you reach the age of 591/2.

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 is includible in income. Generally, early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 591/2.

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).

Generally, an eligible state or local government section 457 deferred compensation plan is not a qualified retirement plan and any distribution from such plan is not 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.

Distributions that are not taxable, such as distributions that you roll over to another qualified retirement plan are not subject to this 10% additional tax.


There are certain exceptions to the 10% additional tax. 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 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 10% of your adjusted gross income (7.5% if you or your spouse is 65 or over) whether or not you itemize your deductions for the year. The 7.5% limitation is a temporary exemption from January 1, 2013 to December 31, 2016 for individuals age 65 and older and their spouses;

  • 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 that are called to active duty for at least 180 days after September 11, 2001.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

  1. 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 defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50;

  2. Distributions made to an alternate payee under a qualified domestic relations order, and

  3. Distributions of dividends from employee stock ownership plans.


Report the 10% additional tax on the appropriate line of Form 1040. 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" is not shown in the appropriate box of Form 1099-R, or

  2. 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 10% additional tax and a distribution code of "1" shows in the appropriate box. In this case enter the 10% additional tax directly 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.


If you are in such a situation that you need to make an early withdrawal from your qualified retirement plan, our advice is to consult a tax professional to make sure you comply with all legal and tax requirements, and/or a financial consultant to make certain that there are no better options for your particular case.







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