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Retirement CPA comments on exceptions to the IRA Early Distribution 10% Additional Tax | Forms 1099-R

Retirement CPA 10% additional tax on IRA early distributions

Gary Bode, CPA: sometimes planning saves you the 10% additional tax on early distributions from your IRA. (910) 399-2705.

Retirement CPAs see lots of folks taking early distributions from their IRA during the recession. Early distribution means you take it out before you’re 59 ½ years old. IRA distribution becomes taxable income. And early distributions incur an additional tax of 10% on the amount of distribution.  How does the IRS know? Your financial institution sends you and the IRS a Form 1099-R. They’ll use Code 1 in the distribution type box of Form 1099-R; early distribution with no known exceptions. Ouch!

I’m just discussing the additional tax of 10% for early distribution.

Exceptions to the 10% Additional Tax on Early Distributions of your IRA

The IRS recognizes there are valid reasons for taking an early distribution of an IRA. Sometimes you’re exempt for the additional tax of 10%, even if Code 1 is on Form 1099-R. So here are some of these exceptions. Remember lots of IRS wrinkles make this a minefield; this is just general advice.

  • Un-reimbursed medical expense. Total medical expenses over 7.5% of your Adjusted Gross Income may be exempt. There’s talk of increasing the threshold to 10% of AGI.
  • Medical insurance payments. Lots of rules here, but basically you have to be, or been unemployed to qualify.
  • You’re disabled.
  • Higher education expenses. The IRS defines qualifying expenses.
  • You inherit an IRA.
  • You use the distribution for a first home. Lots of wrinkles here.
  • The IRS took the IRA as payment for a tax lien.

“Most clients present an early distribution to CPAs after they’ve already taken it. Sometimes planning makes a difference in the 10% additional tax on early IRA distributions.” 
– Gary Bode, retirement CPA

You report the additional tax on Form 5329. For a Code 1 Form 1099-R, your CPA has to make a good case to abate the 10% additional tax. Sometimes your financial institution can change the code on Form 1099-R if they know it’s for an allowed exception. Like most tax work, planning is usually better than reacting after the distribution.

I’m a retirement CPA because I deal with folks who have IRAs. I just saw so much additional tax going to the IRS because of bad circumstances and bad planning. For a free phone consult please call (910) 399-2705.

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