To discourage the use of pension funds for purposes other than normal retirement, the law imposes a 10% additional 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)
There are certain exceptions to this additional tax. There are exceptions that 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 IRS Tax Topic 502.
- Distributions made due to an IRS levy of the plan.
- Distributions to qualified reservists. Generally, these are distributions made 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.)
- Distributions made to you after you separated from service with your employer (State or local government), if the separation occurred in or after the year you reached age 55 or distributions from qualified governmental defined benefit plans if you were a qualified public safety employee who separated from service on or after you reached age 50,
- Distributions made to an alternate payee under a qualified domestic relations order, and
- Distributions of dividends from employee stock ownership plans.
The 10% additional tax is reported on the appropriate line of Form 1040. You must also file Form 5329 if:
- Your distribution is subject to the tax, and distribution code ‘1’ is not shown in the appropriate box of Form 1099-R, or
- 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% additional tax on the appropriate line of Form 1040 and write ‘NO’ on the dotted line next to the appropriate line. To see a list of the distribution codes click Form 1099-R – Distribution Codes.