In addition to being subject to federal and state taxes, most IRA or solo 401k plan distributions are subject to an additional 10% tax.
Usually, the amounts an individual withdraws from a solo 401k or an IRA prior to reaching age 59½ is called ”early” or ”premature” withdrawals. Unless an exception applies, solo 401k participants and IRA holders must pay an additional 10% early withdrawal tax and report the amount to the IRS for any early distributions.
The following chart is a good guide to follow regarding the 10% early penalty when making solo 401k or IRA distributions.
| The distribution will NOT be subject to the 10% additional early distribution tax in the following circumstances: | Exception to 10% Additional Tax | ||
|---|---|---|---|
| Qualified Plans (Solo 401(k), etc.) | IRA, SEP, SIMPLE IRA* and SARSEP Plans | Internal Revenue Code Section(s) | |
| Age | |||
| after participant/IRA owner reaches age 59½ | yes | yes | 72(t)(2)(A)(i) |
| Automatic Enrollment | |||
| permissive withdrawals from a plan with auto enrollment features | yes | yes for SIMPLE IRAs and SARSEPs | 414(w)(1)(B) |
| Corrective Distributions | |||
| corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely | yes | n/a | 401(k)(8)(D), 401(m)(7)(A), 402(g)(2)(C) |
| Death | |||
| after death of the participant/IRA owner | yes | yes | 72(t)(2)(A)(ii) |
| Disability | |||
| total and permanent disability of the participant/IRA owner | yes | yes | 72(t)(2)(A)(iii) |
| Domestic Relations | |||
| to an alternate payee under a Qualified Domestic Relations Order | yes | n/a | 72(t)(2)(C) |
| Education | |||
| qualified higher education expenses | no | yes | 72(t)(2)(E) |
| Equal Payments | |||
| series of substantially equal payments | yes | yes | 72(t)(2)(A)(iv) |
| ESOP | |||
| dividend pass through from an ESOP | yes | n/a | 72(t)(2)(A)(vi) |
| Homebuyers | |||
| qualified first-time homebuyers, up to $10,000 | no | yes | 72(t)(2)(F) |
| Levy | |||
| because of an IRS levy of the plan | yes | yes | 72(t)(2)(A)(vii) |
| Medical | |||
| amount of unreimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65) | yes | yes | 72(t)(2)(B) |
| health insurance premiums paid while unemployed | no | yes | 72(t)(2)(D) |
| Military | |||
| certain distributions to qualified military reservists called to active duty | yes | yes | 72(t)(2)(G) |
| Returned IRA Contributions | |||
| if withdrawn by extended due date of return | n/a | yes | 408(d)(4) |
| earnings on these returned contributions | n/a | no | 408(d)(4) |
| Rollovers | |||
| in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days | yes | yes | 402(c), 402A(d)(3), 403(a)(4), 403(b)(8), 408(d)(3), 408A(d)(3) |
| Separation from Service | |||
| the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees in a governmental defined benefit plan) | yes | no | 72(t)(2)(A)(v), 72(t)(10) |
NOTE: Governmental 457(b) distributions are not subject to the 10% additional tax except for distributions attributable to rollovers from another type of plan or IRA.
The penalty is 25% instead of 10% for a SIMPLE IRA if made within the first 2 years of participation
Staring in 2024, SECURE 2.0 Resulted in the Following Additional Distribution Types NOT Subject to a 10% Early Distribution for those 401k Participants Including Solo 401k Participants Who Are Under Age 59 1/2
- Domestic abuse. Solo 401k participants who take withdrawals up to the lesser of $10,000 (indexed for inflation) or 50% of their vested balance may avoid the 10% tax if they certify they have been the victim of domestic abuse by a spouse or domestic partner within the prior year.
- Emergency events. Solo 401k participants who take withdrawals up to $1,000 (or smaller amounts that leave at least $1,000 of vested benefits in the account afterwards) may avoid the 10% tax if they certify the amount is for a personal or family emergency.
- Federal disasters. Effective for federal disasters occurring on or after January 26, 2021, solo 401k participants may take withdrawals of up to $22,000 within 180 days after the disaster if they live in a federal disaster area and suffer an economic loss in connection therewith.
- Terminal illness. Effective immediately, solo 401k participants who take withdrawals may avoid the 10% tax if they have been certified by a physician as being terminally ill (an illness or physical condition expected to result in death in 84 months or less).
