The taxpayer will receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If the distribution code in box 7 is a code 1 (early distribution), the taxpayer will need to report the 10% penalty on line 58 of Form 1040.
If you change jobs, you may receive the total distribution of your retirement account and make a transfer to another qualified plan, this is known as a rollover. You can use a direct transfer from your old plan to the new plan (either your IRA or the employer retirement plan at your new job). If you choose to receive a cash distribution, it is taxable in the year you receive it unless you roll it over to a new plan within 60 days. Rollovers are not subject to the additional 10% tax.
For a Traditional IRA with nondeductible contributions, the portion of the distribution attributable to the nondeductible contributions is not taxed. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed. If the taxpayer received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
In addition to a code 1 shown in box 7 of Form 1099-R, the following codes could trigger the 10% additional tax:
J - Early distribution from a Roth IRA
L - Loans treated as deemed distributions under section 72(p)
S - Early distribution from a SIMPLE IRA in first 2 years, no known exception
Several exceptions to the 10% additional tax include the following Form 1099-R distribution codes:
2 - Early distribution, exception applies
3 - Disability
4 - Death
7 - Normal distribution
8, D, P - Excess contributions plus earnings/excess deferrals in an employer plan
B - Designated Roth account distribution
E - Excess annual additions under section 415
G - Direct rollover and rollover contribution
H - Direct rollover of a designated Roth account distribution to a Roth IRA
Q - Qualified distribution from a Roth IRA
T - Roth IRA distribution, exception applies
Even if the taxpayer did receive a From 1099-R with a distribution code 1, the 10% additional tax maybe reduced or eliminated by completing Part I of Form 5329 Additional Taxes on Qualified Plans. This form covers the following circumstances (exception code is listed):
- 01 - Distribution made to the taxpayer after employment termination occurred during or after the calendar year reaching age 55 (only applies to employer plans, not IRAs)
- 02 - Distributions made as part of a series of substantially equal periodic payments over the taxpayer's life expectancy or joint life expectancy of taxpayer and beneficiary
- 03 - Distributions made due to permanet and total disability
- 04 - Distribution made to beneficiary due to death
- 05 - Taxpayer paid excess medical expenses (exceeding 7.5% of Adjusted Gross Income) regardless of completing Schedule A Itemized Deductions. Ohio residents can take this deduction whether or not the taxpayer itemized deductions.
- 06 - Qualified retirement plan distributions made to an alternate payee under a qualified domestic relations order (does not apply to IRAs)
- 07 - Distributions made from an IRA to unemployed individuals for health insurance premiums
- 08 - Distributions made from an IRA to pay for qualified higher education expenses for yourself, spouse, children, or grandchildren.
- 09 - Distributions made from an IRA to pay for a first-time home for yourself, spouse, children, or grandchildren, up to $10,000.
- 10 - The distribution is due to an IRS levy of the qualified
- 11 - Qualified reservist distributions for an individual called to active duty after September 11, 2001 for a period of more than 179 days.