This guide provides general education. It does not calculate your taxable amount or replace advice based on your contract, account, records, and filing facts.
Income tax and additional tax are different
The taxable part of an early distribution is included under the rules for the account or contract. A 10% additional tax can apply to the taxable part unless an exception applies.
For qualified retirement arrangements, Publication 590-B and Publication 575 describe relevant exceptions and reporting. For non-qualified annuity contracts, Publication 575 describes the section 72(q) additional-tax rules and exceptions.
Exceptions are fact-specific
The exception lists differ by arrangement. Disability, death, certain periodic-payment arrangements, and other events may receive special treatment, but the definitions and documentation requirements matter.
A Form 1099-R distribution code reports the payer’s information. Code 1 can mean the payer knows of no exception; it does not decide whether the taxpayer can establish one. Form 5329 is used for additional taxes and certain exception reporting.
Ordering affects the amount exposed
For a non-qualified annuity, a pre-annuity-starting-date withdrawal may be treated as coming from income before investment in the contract, subject to the governing rules. That ordering can affect the taxable amount to which an additional tax is applied.
For an IRA with basis, the pro rata rules can affect the taxable part. A distribution is not assigned only to one IRA’s after-tax dollars merely because it came from that account.
Keep three questions separate
A useful review separates the federal income inclusion, the federal additional tax, and any contract surrender charge.
- What portion is taxable income?
- Does an additional-tax exception apply, and what proves it?
- Does the contract impose a non-tax surrender charge?