Calulating Penalty From Early Withdrawal From Rollover IRA

Submitted by THOMAS WNUK on Sun, 2020-02-16 20:34

A person has a 401k valued at say $22,000 with an employer. That person leaves the employer and rolls the 401k into a rollover IRA. The person withdraws $8,000 from the IRA in 2019.

I assume the IRA is 100% taxable.

How does one determine the 10% penalty for early withdrawal? Would you put $8000 on line 4a of form 1040 with the taxable amount of $8800 on line 4b or would the $800 go as other income on line 8 of schedule 1? The info that I’ve found browsing the net seems like a complicated mess.



Submitted by tomd37 on Sun, 2020-02-16 21:53

Assuming the $8,000 is an early distribution and not qualified for an exemption, I think the $8,000 is reported on Part 1 of Form 5329.  I believe the 10% tax penalty of $800 would then carry over to Form 1040 Schedule 2 line 6 as an additional tax. Let’s see what others have to say. 

Submitted by THOMAS WNUK on Sun, 2020-02-16 22:34

The tax on $8,000 from the tables is $803 so a 10% penalty on that would be $80 I think.

Submitted by Alan - IRA critic on Sun, 2020-02-16 23:04

The income tax on the distribution does not matter. The early withdrawal penalty is 10% of the taxable amount of the distribution, or $80. You came up with the same figure by coincidence because the amount of the distribution, if that was the only taxable income, happens to be in the 10% bracket.

Submitted by Alan - IRA critic on Sun, 2020-02-16 22:21

The 5329 is not needed. The penalty amount is entered directly on line 6 of Sch 2, and the Sch 2 total additional taxes then transfer to line 15 of Form 1040.

Submitted by THOMAS WNUK on Sun, 2020-03-01 23:13

So how is one supposed to know if box 7 is properly checked with a 1 in it?

Submitted by Alan - IRA critic on Mon, 2020-03-02 00:33

  • An IRA custodian must code Box 7 with Code 1 if the IRA owner is under 59.5 unless a direct transfer to a Roth IRA was done, the IRS filed a levy of the IRA, the person is distributing substantially equal payments (72t plan), or the person is disabled or died.
  • But there are other exceptions to the penalty the person may qualify even if the 1099R is coded 1. Those are higher education expenses, high medical expenses, first home purchase, or paying for health insurance while unemployed. In these cases, the person can file Form 5329 and enter the applicable penalty exception code and the penalty is waived. In other words, in these cases the penalty will be waived even if the 1099R properly shows Code 1.

Submitted by THOMAS WNUK on Mon, 2020-03-02 03:01

Thank You. None of those instances appear to apply.

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