Section 72(t) of the Internal Revenue Code deals with a 10 percent additional tax on early distributions from individual retirement accounts and other qualified plans. Normally, you include all distributions from a traditional IRA in your taxable income when figuring out how much you owe the IRS each year. If you take withdrawals before reaching age 59 1/2, you may also be liable for the additional 10 percent penalty unless you meet one of the exceptions listed in Section 72(t).
Summary of 72(t)(2A)
Section 72(t)(2A) describes several exceptions to the 10 percent early withdrawal penalty for distributions made:
- On or after reaching age 59 1/2
- To a beneficiary after the death of the IRA owner
- To a disabled IRA owner
- As part of an annuity
- On account of an IRS levy
The annuity exception refers to a series of substantially equal periodic payments, made at least annually, in an amount determined by your expected lifespan as of the age at which you begin the distributions. The annuity must remain in effect for at least five years or the penalty will be retroactively applied, with interest.
An IRS levy is an assessment taken directly from your IRA to pay back-taxes, including penalties and interest.
The remainder of Section 72(t) offers some additional exceptions:
- Medical expenses: You don't owe a penalty to the extent you have unreimbursed medical expenses in excess of 10 percent of your adjusted gross income. The threshold is only 7.5 percent if you or your spouse were born before January 2, 1950.
- Qualified domestic relations orders: If a court order or legal settlement compel you to make alimony, separation or child support payments, you can use money from your IRA to make the payments without triggering the 10 percent penalty
- Health insurance premiums: The penalty is waived if you use the money when you are unemployed to pay for health insurance premiums. You must have received at least 12 consecutive weeks of unemployment insurance, or would have received it had you not been self-employed.
- Higher education expenses: The expenses cover only qualified education expenses -- tuition, books, supplies equipment and fees -- at qualified education institutions, which are organizations that are eligible to participate in federal student aid programs.
- First home: You can use up to $10,000 of IRA money penalty-free to pay for buying, building or rebuilding your first home. In this case, a first home is actually the first home you own in a two-year period. The home must be the primary residence and can belong to you, your spouse, an ancestor or a descendent.
- Active duty: You receive a penalty exception if you are a reservist called to at least 180 days of active service. Qualifying reservist organizations include the Army National Guard, any of the military reserves, and the Reserve Corps of the Public Health Service
If you must pay the 10 percent penalty, file IRS Form 5329 to report the amount and attach it to Form 1040 when you fill out your tax return.