It may be very tempting to withdraw money from your retirement plans before reaching retirement age.  So to discourage the use of these plans for purposes other than retirement, there is a 10% additional tax on early distributions from a qualified retirement plan or IRA before reaching age 59-1/2.  This penalty tax does not apply to distributions rolled over to another IRA or qualified plan. 

A “qualified retirement plan” is a plan that complies with special Internal Revenue Code requirements and IRS Regulations.  Examples include 401(k) plans, section 403(a) and section 403(b) plans.

The 10% penalty tax on early distributions is reported and paid when Form 1040 is filed.  There are exceptions to the 10% penalty.  If distributions are part of a scheduled series of substantially equal periodic payments over the life expectancy of the plan owner and the beneficiary, the penalty is avoided.  However, periodic payments must be made on an annual basis and continue until the later of five years or when age 59-1/2 is reached.  Other exceptions apply as well.  For a list of these exceptions and additional information about retirement plan distributions, visit www.irs.gov.