Ten Percent Penalty
As a general rule, a 10 percent penalty applies for a distribution
before age 59-1/2. A higher penalty (25 percent) applies for taking
a distribution from a SIMPLE plan within the first two years of participation.
Your 1099-R should show a distribution code of "S" in Box 7 if this
25 percent rate applies.
Exceptions for all plan types. The
10 percent penalty does not apply to qualified plans or IRAs if the
distributions are:
- made to a beneficiary or the estate of the plan participant on
or after the participant's death
- made because you are totally and permanently disabled
- made as part of a series of substantially equal periodic payments,
at least annually, over your life (or life expectancy) or the joint
lives (or expectancies) of you and your beneficiary; if from a qualified
employee plan, benefits must start after separation from service
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Work Smart If you want to take advantage of
this last exception, talk to your financial planner about setting
up a series of equal payments. There are a number of ways to calculate
the payments that are acceptable to the IRS, and your choice among
them should depend on things like the size of your lump sum and whether
you need more or less cash from the plan each year. However,
once you set up a method, you must stick with it. If you deviate from
your chosen method before the end of five years or your attainment
of age 59-1/2 (whichever takes longer), for any reason other than
death or disability, you'll generally have to pay a recapture tax,
plus interest, on all distributions received thus far. |
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Exceptions for IRAs. See also our discussion
on premature distributions from IRAs and
some special exceptions that can apply.
Exceptions for
qualified retirement plans. The 10 percent penalty does not
apply to qualified plans if the distributions are:
- made to you after you separated from service if the separation
occurred during or after the calendar year in which you reached age
55
- paid to alternate payees (such as a divorced spouse) under a qualified
domestic relations order (QDRO)
- not more than your deductible medical expenses (those over 7-1/2
percent of your AGI), whether or not you itemized deductions in 2014
- dividend distributions from an employer's securities held in an
employees' trust or annuity plan
- due to an IRS levy
- made to correct excess deferrals, excess contributions, or excess
aggregate contributions
Exceptions for nonqualified annuities. The
10 percent penalty does not apply to payments from deferred annuity
contracts not purchased by qualified employer plans (i.e.,
deferred annuities you purchased from a commercial provider) if the
payments are:
- allocable to investment in a deferred annuity contract before
August 14, 1982
- from an annuity contract under a qualified personal injury settlement
- made under an immediate annuity contract
- made under a deferred annuity contract purchased by your employer
at the termination of a qualified retirement plan or qualified annuity
that is held by your employer until you separate from service
Reporting the excise tax. If you owe only
the extra 10 percent tax on premature distributions, and distribution
code 1 is shown in Box 7 of your 1099-R, you can simply enter 10 percent
of your taxable distribution on Line 58 of Form 1040. Write "no"
on the dotted line next to Line 58 to show that you don't have to
file Form 5329.
Otherwise, you must complete Form 5329, Additional
Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts and
attach it to your tax return. This form is also required if you meet
an exception to the tax but your 1099-R form does not indicate a code
for an exception in Box 7, or the code is incorrect.
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