As is the case with many areas of the income tax laws, retirement plans can be a relatively complex subject. This situation is further compounded by the fact that there are literally hundreds of different retirement plans throughout the United States. This post is strictly limted to the additional income taxes that are associated with (related to) the early withdrawal (distributions) from a “traditional IRA” retirement plan.
If you are eligible to participate and have made contributions to your Individual Retirement Arrangement (IRA) plan those contributions are considered to be “tax deferred” , specifically the income is not reported on your W-2 in the year that you earn it. The income will not be taxed until you begin receiving distributions from your IRA plan. One of the fundamental tenets for establishing an IRA is to postpone the related income taxes from the present time (based on your current income tax bracket rate) until you have retired and will probably be earning less or may/will be in a lower income tax bracket rate.  The earliest point in your life in which IRA plan distributions can be received by you, without a 10% tax penalty (essentially a surtax), is age 59 1/2. You must begin receiving distributions prior to April 1st in the year after you have reached the age of 70 1/2. At that age you must receive at least the  “Required Minimum Distribution” (RMD) each year. From the IRS website: “You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent’s IRA.”
You will receive a 1099 R from your retirement plan administrator if you have received an “early distribution” from your IRA plan. Look in Block #7 (Distribution Code) of that form and there will be a code “1”. Your tax software will correctly report all of the income (i.e. either on line #15 or #16 of your Federal form 1040) and the early distribution 10% tax penalty will appear on line #58.Â
There are fifteen “exceptions” to the 10% early distribution tax penalty which are provided in the tax laws. These exceptions can be found using this link to the IRS website.  The best source for information related to Individual Retirement Arrangements (IRAs) is IRS Publication 590.Â
If you have any questions or are not absolutely sure of the facts and income tax reporting requirements, you should contact the IRS (1-800-829-1040), your IRA retirement plan administrator, your tax preparer, or your CPA. In complex situations “all of the above” may be the best answer!Â