Early Distributions
You must include early distributions of taxable amounts from your
traditional IRA in your gross income. Early distributions are also subject to an
additional 10% tax, as discussed later.
Early distributions defined. Early
distributions are amounts distributed from your traditional IRA account or annuity before
you are age 59½, or amounts you receive when you cash in retirement bonds before
you are age 59½.
Exceptions. In
certain situations, you may not have to pay the 10% additional tax even if amounts are
distributed from your IRA before you are age 591/2. These
situations are listed below.
- You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross
income.
- The distributions are not more than the cost of your medical insurance.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You are receiving distributions in the form of an annuity.
- The distributions are not more than your qualified higher education expenses.
- You use the distributions to buy, build, or rebuild a first home.
- The distribution is due to an IRS levy of the qualified plan.
Most of these exceptions are explained earlier at Exceptions under Age
59½ Rule.
Note. Distributions that are timely and properly rolled over, as
discussed earlier, are not subject to either regular income tax or the 10% additional tax.
Certain withdrawals of excess contributions are also tax free and not subject to the 10%
additional tax. (See Excess Contributions Withdrawn by Due Date of Return, and Excess
Contributions Withdrawn After Due Date of Return, earlier.) This also applies to
transfers incident to divorce, as discussed under Can I Move Retirement Plan Assets,
earlier.
Receivership distributions. Early distributions (with or
without your consent) from savings institutions placed in receivership are subject to this
tax unless one of the above exceptions applies. This is true even if the distribution is
from a receiver that is a state agency.
Additional 10% tax. The
additional tax on early distributions is 10% of the amount of the early distribution that
you must include in your gross income. This tax is in addition to any regular
income tax resulting from including the distribution in income.
Use Form 5329 to figure the tax. See the discussion of Form 5329, later, under Reporting
Additional Taxes for information on filing the form.
Example. Tom Jones, who is 35 years old, receives a $3,000
distribution from his traditional IRA account. Tom does not meet any of the exceptions to
the age 59½ rule, so the $3,000 is an early distribution. Tom never made any
nondeductible contributions to his IRA. He must include the $3,000 in his gross income for
the year of the distribution and pay income tax on it. Tom must also pay an additional tax
of $300 (10% × $3,000). He files Form 5329. See the filled-in Form 5329.
![Form 5329, page 1 Tom Jones](../images2/15160x27.gif)
Form 5329, page 1 Tom Jones
Early
distributions of funds from a SIMPLE retirement account made within 2 years of beginning
participation in the SIMPLE are subject to a 25%, rather than 10%, early distributions
tax.
Nondeductible contributions. The
tax on early distributions does not apply to the part of a distribution that represents a
return of your nondeductible contributions (basis).
Excess Accumulations
(Insufficient Distributions)
You cannot keep amounts in your traditional IRA indefinitely.
Generally, you must begin receiving distributions by April 1 of the year following the
year in which you reach age 70½ (your 701/2 year). The required
minimum distribution for any year after your 701/ year must be made
by December 31 of that later year.
Tax on excess. If distributions are less than the required
minimum distribution for the year, discussed earlier under When Must I Withdraw IRA
Assets? (Required Distributions), you may have to pay a 50% excise tax for that year
on the amount not distributed as required.
Reporting the tax. Use Form
5329 to report the tax on excess accumulations. See the discussion of Form 5329,
later, under Reporting Additional Taxes, for more information on filing the form.
Request to excuse the tax. If
the excess accumulation is due to reasonable error, and you have taken, or are taking,
steps to remedy the insufficient distribution, you can request that the tax be
excused.
If you believe you qualify for this relief, do the following.
- File Form 5329 with your Form 1040.
- Pay any tax you owe on excess accumulations.
- Attach a letter of explanation.
If the IRS approves your request, it will refund the excess accumulations tax you paid.
Exemption from tax. If you are unable to make required distributions
because you have a traditional IRA invested in a contract issued by an insurance company
that is in state insurer delinquency proceedings, the 50% excise tax does not apply if the
conditions and requirements of Revenue Procedure 92-10 are satisfied. Those conditions and
requirements are summarized below. Revenue Procedure 92-10 is in Cumulative Bulletin
1992-1. To obtain a copy of this revenue procedure, see Mail in chapter 6.
You can also read the revenue procedure at most IRS offices and at many public libraries.
Conditions. To qualify for exemption from the tax, the
assets in your traditional IRA must include an affected investment. Also, the amount of
your required distribution must be determined as discussed earlier in Minimum
Distributions under When Must I Withdraw IRA Assets.
Affected investment defined. Affected investment means an
annuity contract or a guaranteed investment contract (with an insurance company) for which
payments under the terms of the contract have been reduced or suspended because of state
insurer delinquency proceedings against the contracting insurance company.
Requirements. If your traditional IRA (or IRAs) includes
other assets in addition to your affected investment, all traditional IRA assets,
including the available portion of your affected investment, must be used to satisfy as
much as possible your IRA distribution requirement. If the affected investment is the only
asset in your IRA, as much as possible of the required distribution must come from the
available portion, if any, of your affected investment.
Available portion. The available portion of your affected
investment is the amount of payments remaining after they have been reduced or suspended
because of state insurer delinquency proceedings.
Make up of shortfall in distribution. If the payments to
you under the contract increase because all or part of the reduction or suspension is
canceled, you must make up the amount of any shortfall in a prior distribution because of
the proceedings. You make up (reduce or eliminate) the shortfall with the increased
payments you receive.
You must make up the shortfall by December 31 of the calendar year following the year
that you receive increased payments.
Reporting Additional Taxes
Generally, you must use Form 5329 to report the tax on excess
contributions, early distributions, and excess accumulations.
Filing Form 1040. If you file
Form 1040, complete Form 5329 and attach it to your Form 1040. Enter the total
amount of IRA tax due on line 58, Form 1040.
Note. If you have to file an individual income tax return and
Form 5329, you must use Form 1040.
Not filing Form 1040. If you do not have to file a Form 1040 but do
have to pay one of the IRA taxes mentioned earlier, file the completed Form 5329 with the
IRS at the time and place you would have filed Form 1040. Be sure to include your address
on page 1 and your signature and date on page 2. Enclose, but do not attach, a check or
money order payable to the United States Treasury for the tax you owe, as shown on Form
5329. Write your social security number and 2002 Form 5329 on your check or money
order.
Form 5329 not required. You do not have to use Form 5329 if
either of the following situations exist.
- Distribution code 1 (early distribution) is correctly shown in box 7 of Form 1099-R. If
you do not owe any other additional tax on a distribution, multiply the taxable part of
the early distribution by 10% and enter the result on line 58 of Form 1040. Write No
to the left of line 58 to indicate that you do not have to file Form 5329. However, if you
owe this tax and also owe any other additional tax on a distribution, do not enter this
10% additional tax directly on your Form 1040. You must file Form 5329 to report your
additional taxes.
- If you rolled over part or all of a distribution from a qualified retirement plan, the
part rolled over is not subject to the tax on early distributions.
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