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  • tara berks
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    Tax Topic 558

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    Refundtalk
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    Topic 558 – Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
    To discourage the use of retirement funds for purposes other than normal retirement, the law imposes an additional 10% 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 additional 10% 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 additional 10% tax.

    No Additional 10% Tax
    Distributions that aren’t taxable, such as distributions that you roll over to another qualified retirement plan, aren’t subject to this additional 10% tax. For more information on rollovers, refer to Topic 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 additional 10% 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’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 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or over) whether or not you itemize your deductions for the year. The 7.5% limitation is effective only from January 1, 2013 to December 31, 2016 for individuals age 65 and older and their spouses. For more information on medical expenses, refer to Topic 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.
    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 made from a qualified governmental defined benefit plan if you were a qualified public safety employee (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, and
    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-B (PDF), Distributions from Individual Retirement Arrangements (IRAs).

    Reporting the Additional 10% Tax
    Report the additional 10% tax on the appropriate line of Form 1040 (PDF), U.S. Individual Income Tax Return. You must also file Form 5329 (PDF), Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, if:

    Your distribution is subject to the tax and distribution code 1 isn’t shown in the appropriate box of Form 1099-R (PDF), Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or
    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 additional 10% tax and a distribution code 1 shows in the appropriate box. In this case, enter the additional 10% tax directly on the appropriate line of Form 1040 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 additional 10% 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.

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