Exceptions to Early Solo 401k & IRA Distribution Tax Penalties

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 PlansInternal Revenue Code Section(s)
Age
after participant/IRA owner reaches age 59½yesyes72(t)(2)(A)(i)
Automatic Enrollment
permissive withdrawals from a plan with auto enrollment featuresyesyes for SIMPLE IRAs and SARSEPs414(w)(1)(B)
Corrective Distributions
corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timelyyesn/a401(k)(8)(D),
401(m)(7)(A),
402(g)(2)(C)
Death
after death of the participant/IRA owneryesyes72(t)(2)(A)(ii)
Disability
total and permanent disability of the participant/IRA owneryesyes72(t)(2)(A)(iii)
Domestic Relations
to an alternate payee under a Qualified Domestic Relations Orderyesn/a72(t)(2)(C)
Education
qualified higher education expensesnoyes72(t)(2)(E)
Equal Payments
series of substantially equal paymentsyesyes72(t)(2)(A)(iv)
ESOP
dividend pass through from an ESOPyesn/a72(t)(2)(A)(vi)
Homebuyers
qualified first-time homebuyers, up to $10,000noyes72(t)(2)(F)
Levy
because of an IRS levy of the planyesyes72(t)(2)(A)(vii)
Medical
amount of unreimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65)yesyes72(t)(2)(B)
health insurance premiums paid while unemployednoyes72(t)(2)(D)
Military
certain distributions to qualified military reservists called to active dutyyesyes72(t)(2)(G)
Returned IRA Contributions
if withdrawn by extended due date of returnn/ayes408(d)(4)
earnings on these returned contributionsn/ano408(d)(4)
Rollovers
in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 daysyesyes402(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)yesno72(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

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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