Distribution code is 7, but the 59 1/2 rule says I have to pay more taxes

[rstebna]

What is the 59 1/2 age rule?

[DoninGA]

If you had a distribution from a tax deferred retirement plan and you were under the age of 59 1/2 at the time of the distribution then there is a 10% early distribution penalty added to the tax return you are filing.

[VolvoGirl · Accepted solution]

If you were under 59 1/2 when you took a withdrawal there is a 10% Early Withdrawal Penalty in addition to any income tax on it.

You didn’t actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.

It has to break out and show the 10% penalty separately on your return (schedule 2 line 6 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.

[SteamTrain]

Who is it from?  Military/DFAS??

[LindaS5247]

Retirement accounts, including 401(k) plans, are designed to help people save for retirement. As such, the tax code incentivizes saving by offering tax benefits for contributions and usually penalizing those who withdraw money before the age of 59½.

Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn. 

Regarding the code 7 on your Form 1099-R.  Does your Form 1099-R have a Code 7?

Code 7 indicates a normal distribution.  

Code 1 indicates an early distribution from a retirement plan (except ROTH), and no exceptions apply (See list below).

Code 2 indicates an early distribution (Except ROTH) and an exception applies. 

If you believe your Form 1099-R is incorrect, you should consult with the issuer.

There are exceptions to the 10% tax penalty for early distributions:

• Death or total and permanent disability
• Series of substantially equal periodic payments based on life expectancy
• Qualified first-time homebuyer distributions up to $10,000
• Qualified higher-education expenses
• Certain medical insurance premiums paid while unemployed
• Unreimbursed medical expenses that are more than a certain amount of your adjusted gross income
• IRS levy
• Certain distributions to qualified military reservists called to active duty
• Beneficiary of a deceased IRA Owner
• Qualified Birth or Adoption costs

Once you enter the distribution information from your 1099-R form, we'll help you check for any exceptions that could reduce the tax.

Click here for explanation of codes for Box 7 of Form 1099-R.

Click here for additional information on early withdrawals.

Click here for additional information on taking an early withdrawal from your 401(K).