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|
(Solo 401(k), etc.)
|IRA, SEP, SIMPLE IRA* and SARSEP Plans||Internal Revenue Code Section(s)|
|after participant/IRA owner reaches age 59½||yes||yes||72(t)(2)(A)(i)|
|permissive withdrawals from a plan with auto enrollment features||yes||yes for SIMPLE IRAs and SARSEPs||414(w)(1)(B)|
|corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely||yes||n/a||401(k)(8)(D),|
|after death of the participant/IRA owner||yes||yes||72(t)(2)(A)(ii)|
|total and permanent disability of the participant/IRA owner||yes||yes||72(t)(2)(A)(iii)|
|to an alternate payee under a Qualified Domestic Relations Order||yes||n/a||72(t)(2)(C)|
|qualified higher education expenses||no||yes||72(t)(2)(E)|
|series of substantially equal payments||yes||yes||72(t)(2)(A)(iv)|
|dividend pass through from an ESOP||yes||n/a||72(t)(2)(A)(vi)|
|qualified first-time homebuyers, up to $10,000||no||yes||72(t)(2)(F)|
|because of an IRS levy of the plan||yes||yes||72(t)(2)(A)(vii)|
|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)|
|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|if withdrawn by extended due date of return||n/a||yes||408(d)(4)|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)|
|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),|
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).