According to a 2024 report by the Treasury Inspector General for Tax Administration (TIGTA), Americans made early distributions of $12.9 billion in 2021. Early distributions—those taken before age 59 ½—are subject to a 10% additional tax or early distribution penalty. To that end, the following are some of the strategies that you can utilize to avoid the 10% early distribution penalty.
Wait until actually reaching age 59 ½
According to IRS regulations, one reaches the half mark six calendar months after the target age. While this might seem like an easy determination, it is complicated because some IRA custodians count the 6 months in months, while some count it in days. For a 365-day year, the half mark is 182.5 days, and some custodians that count the six months in days round down, while others round up. Rounding up could cause an IRA owner who takes a distribution on the day they reach age 59 ½ to find themselves with a 1099-R that indicates that they (might) owe the IRS the 10% early distribution penalty.
Example: Jamie was born on June 30, 1966, and reaches age 59 on June 30, 2025. Jamie will attain age 59 ½ on December 30, 2025. Any distribution taken by Jamie on December 30, 2025, or after, would be exempt from the 10% early distribution penalty.
Jamie’s IRA custodian counts the months as 365 days divided by 2 = 182.5 and rounds up to 183 days. Jamie requests a distribution of $200,000 on December 29, 2025, and his IRA custodian inputs a Code 1 in Box 7 of his Form 1099-R, indicating that as far as the IRA custodian knows, Jamie’s distribution is subject to a 10% early distribution penalty—which would be $20,000 for Jamie.
The Fix: Jamie should request that his custodian issue a corrected 1099-R with a Code 7, given that the IRS regulations count the 6 months in months.
Preventative Solution: IRA owners and plan participants should confirm with their custodians or plan trustees when they will become eligible to take normal distributions and wait until that date to take them. A normal distribution occurs at age 59 ½ or later and is reported with a Code 7 in Box 7 of Form 1099-R.
Do not lose qualification for age 55 and QDRO exceptions
One of the most important considerations when claiming an exception to the 10% early distribution penalty is whether the exception applies to the account from which the distribution is being made. Taxpayers who move money between IRAs and employer plans could either lose qualification for an exception. The following are some examples.
The Age 55 Exception: This exception applies to distributions from employer plans where the participant separates from service with the employer that provides the retirement plan, and the separation occurs in the year the participant reaches age 55 or later. Distributions taken after such separation are exempt from the 10% early distribution penalty.
Case Study—Kim v. Comm’r, 11-3390 (7th Cir. 2012): Fifty-six-year-old Kim lost his job with Widgets and Things in 2025. While searching for a new job, Kim used up all his short-term savings and had to take distributions from his Widgets and Things 401(k). Kim finds it easier to request distributions from his local credit union than from his old 401(k) account, so he decided to roll over the 401(k) account to his IRA, which is held with the credit union.
Kim requested a distribution from his IRA at age 57. His IRA custodian input Code 1 in Box 7 of the 1099-R issued for the distribution. Code 1 means that the distribution does not qualify for an exception as far as the Credit Union can tell.
When Kim filed his tax return, he did not pay the 10% early distribution penalty because, according to his logic, the distribution came from money held in his 401(k) account, and distributions from his 401(k)-account qualified for the age 55 exception.
The IRS challenged Kim, stating that the distribution did not qualify for the age 55 exception because it was made from an IRA.
Kim took the IRS to court, and the court sided with the IRS. The court explained to Kim that while he did originally qualify for the age 55 exception, he lost that qualification by rolling over the amount to an IRA because distributions from IRAs do not qualify for that exception.
Qualified Domestic Relations Order (QDRO): A spouse or former spouse who receives a share of a participant’s employer plan account under a qualified domestic relations order (QDRO) may have such an amount distributed to them when allowed under the terms of the plan. QDRO amounts that are paid directly to the spouse or former spouse are exempt from the 10% early distribution penalty. But, like the age 55 exception, if these amounts are rolled over to an IRA, they lose the qualification for the QDRO exception to the penalty.
Spouse beneficiary: do not transfer inherited IRAs to own IRA
A spouse beneficiary has two primary options for an inherited IRA:
- Keeping the assets in a beneficiary IRA
- Moving the assets to their own IRA or employer plan account
Distributions from a beneficiary IRA are reported with a Code 4 in Box 7 of Form 1099-R. A Code 4 lets the IRS and other interested parties know that the 10% early distribution penalty does not apply.
Pre-59 ½ distributions from a spouse beneficiary’s own IRA are reported with a Code 1 in Box 7 of Form 1099-R, unless a qualifying exception applies.
If a spouse beneficiary is under age 59 ½ and plans to take distributions before reaching age 59 ½, keeping the assets in the beneficiary IRA will avoid the 10% early distribution penalty.
When early distribution is a must, look for exceptions
IRAs are designed to provide income during retirement, and the 10% early distribution penalty serves as a deterrent for those tempted to take early distributions. But sometimes life happens, and one has no choice but to take distributions earlier than planned. When such distributions occur before age 59 ½ and put one at risk of being subject to the early distribution penalty, one must look for opportunities to claim an exception.
