Individuals must pay an additional 10% early withdrawal tax unless an exception applies, according to Internal Revenue Service. Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax, according to Internal Revenue Service.
Key takeaways for additional 10 percent tax on an early retirement withdrawal
- Before you enter the withdrawal, confirm which rate applies to the client’s specific account type.
- This 10 percent figure is the baseline additional tax for early distributions from qualified retirement plans.
- However, the rate is not uniform across all account types.
- For a SIMPLE IRA, distributions made within the first 2 years of participation incur a 25% additional tax instead of 10%, according to Internal Revenue Service.
- The statutory basis for the standard rate is found in the U.S. Code.
The short answer before you enter an early withdrawal
This tax is separate from standard income tax, which also applies to most retirement plan distributions, according to Internal Revenue Service. Before you enter the data, you must determine if the client has crossed the specific age threshold that defines an "early" distribution.
The IRS defines this threshold clearly. Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called "early" or "premature" distributions, according to Internal Revenue Service. If your client is younger than 59 and a half, the withdrawal falls into this category. The 10% tax is the default consequence of this status, unless a specific exception named by the IRS applies.
If the client's question is an IRA withdrawal age other than this 59½ line, see Age 73 IRA withdrawal checks in 4 sources.
Do not assume the 10% rate is the only possible additional tax. The IRS page notes that other rates may apply to specific account types, such as SIMPLE IRAs, which are detailed in other sections of this guide. Your immediate task is to verify the client's age against the 59½ line. If the client is under that age, you are dealing with an early distribution. The next step is to check if any exceptions apply to this specific client's situation.
The IRS age line and the Form 5329 line
The age line that triggers the early distribution check is 59½. The Legal Information Institute provides the statutory language for this age marker in 26 U.S. Code § 72, noting distributions made on or after the date on which the employee attains age 59½, according to Legal Information Institute. This statutory phrasing confirms the specific date-based calculation for the age limit.
Reporting the additional tax requires a specific form. The Internal Revenue Service instructs preparers to use Form 5329 to report distributions subject to the 10% additional tax on early distributions from a qualified retirement plan, including traditional IRAs, according to Internal Revenue Service. This form is the designated vehicle for calculating and reporting the penalty when the age exception does not apply. You must determine if the client qualifies for an exception before finalizing the Form 5329 entry. The form serves as the record for this specific penalty calculation.
Before the return is signed, use Preparer duties before signing a return: 4 checks.
The SIMPLE IRA 25 percent line and the 60-day line
When the client’s account is a SIMPLE IRA, the tax rate changes based on how long they have participated in the plan. This specific 25% rate applies only during that initial two-year window. Once the two-year participation period ends, the standard 10% additional tax applies to early distributions, as outlined in the same Internal Revenue Service guidance.
The statute provides the same substitution rule for simple retirement accounts. According to Legal Information Institute, in the case of any amount received from a simple retirement account (within the meaning of section 408(p)) during the 2-year period beginning on the date such individual first participated in any qualified salary reduction arrangement maintained by the individual’s employer under section 408(p)(2), paragraph (1) shall be applied by substituting “25 percent” for “10 percent”.
The Internal Revenue Service page also points to FAQs regarding waivers of the 60-day rollover requirement, which may apply in certain circumstances.
For your client, determine the account type and the participation date. If it is a SIMPLE IRA and the withdrawal is within the first 2 years, the additional tax is 25%. Check the IRS list for an in-plan Roth rollover or an eligible distribution contributed to another retirement plan or IRA within 60 days. Record these details on your note before entering the withdrawal.
The statute's 10 percent sentence and the 25 percent substitution
The statutory language defines the base calculation for the additional tax. According to Legal Information Institute, if any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. This sentence establishes the specific percentage increase applied to the includible portion of the withdrawal. The text identifies the source of the funds as a qualified retirement plan and specifies the timing of the tax increase as the taxable year in which the amount is received.
The same statutory provision appears in the U.S. According to GovInfo, if any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. This version confirms the 10 percent figure and the requirement that the increase applies to the portion includible in gross income. Both sources provide the identical statutory sentence regarding the 10 percent increase for amounts from qualified retirement plans.
Filled reference table of the quoted rules
The following table summarizes the specific rules and definitions regarding early withdrawal taxes. Each row cites the publisher and the exact language from the source document.
| Publisher | Rule or Definition | Source Quote |
|---|---|---|
| Internal Revenue Service | An additional 10% early withdrawal tax applies unless an exception is met. | "Individuals must pay an additional 10% early withdrawal tax unless an exception applies." |
| Internal Revenue Service | SIMPLE IRA distributions in the first 2 years incur a 25% tax instead of 10%. | "SIMPLE IRA: Distributions made from a SIMPLE IRA plan within the first 2 years of participation incur a 25% additional tax instead of 10%." |
| Legal Information Institute | Tax is increased by 10 percent of the includible amount from a qualified retirement plan. | "If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income." |
| FINRA | Withdrawals before age 59½ generally incur a 10 percent penalty. | "You generally cannot make withdrawals before age 59½ without paying an early withdrawal penalty, which is 10 percent of the amount you withdraw." |
When entering a withdrawal, verify the account type against these specific rates. If the account is a SIMPLE IRA and the client has participated for less than 2 years, the 25% rate applies rather than the standard 10%. For other qualified plans, the 10% additional tax is the baseline rule cited by the IRS and the statute. The age 59½ threshold is the specific point where the penalty generally stops applying, as noted by FINRA. Use the table above to confirm which rate applies to the specific client scenario before proceeding with data entry.
Illustrative example of a 10 percent early withdrawal
This example uses round numbers only and is not a client file. Suppose the includible portion of a withdrawal is 10000. The note shows 10000 as the base for the additional tax, because the 10 percent rule uses the includible portion. If an exception applies, mark that exception beside the 10000 base. If no exception applies, the additional tax follows the 10 percent rule on that includible portion. If the account is a SIMPLE IRA and the amount is received during the first 2 years of participation, substitute 25 percent for 10 percent on that same includible portion. A separate line asks whether the item is an in-plan Roth rollover or an eligible distribution contributed to another retirement plan or IRA within 60 days. The note can also show 0 when no amount is includible in gross income. Round figures stay illustrative and follow the age line and the account type.
Write a withdrawal note for this client
Write the client's age and the account type on a note before you enter the withdrawal, and mark whether the question is the 10 percent tax or a named exception.
Use this note to record the specific details before you enter the data.
Put the rate you confirm, the age line, and the account type on the note before the withdrawal is entered.
Check the participation date on that note when the account is a SIMPLE IRA, and keep the first 2 years separate from the 10 percent line. Write whether an exception applies next to the rate, so the Form 5329 entry is not finished before that check.
Record the age and account type with the Accounting Client Intake Checklist for a Clear Handoff.
Early withdrawal FAQ
What does the 10 percent sentence cover?
The rule applies to amounts from a qualified retirement plan that are includible in gross income. This scope defines the base amount to which the additional tax attaches.
What age does the IRS page use?
The IRS page uses age 59½ as the line for early distributions. This age threshold determines when the early distribution label applies.
When does the page say 25 percent instead?
The page specifies a 25 percent rate for SIMPLE IRA distributions within the first 2 years of participation. This substitution applies only to that specific plan type and timeframe.
What is Form 5329 for?
Form 5329 is used to report distributions subject to the 10% additional tax. The IRS directs taxpayers to use Form 5329 to report distributions subject to the 10% additional tax on early distributions from a qualified retirement plan, including traditional IRAs, according to Internal Revenue Service. This form handles the reporting requirement for the additional tax.
What does a 60-day sentence not promise?
The 60-day sentence does not promise to skip the tax without meeting the sentence's own conditions. The IRS lists in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days as a specific item, according to Internal Revenue Service. The sentence references FAQs regarding waivers of the 60-day rollover requirement, indicating conditions apply.