What is the early distribution penalty and when does it apply?

The 10% early distribution penalty applies to distributions from IRAs, 401(k)s, and other qualified plans taken before age 59½. The penalty is in addition to regular income tax. Exceptions include: disability, death, SEPP (72(t) payments), medical expenses, health insurance premiums while unemployed, qualified higher education expenses, first-time home purchase ($10,000 lifetime), IRS levy, and SECURE 2.0 additions. [IRC §72(t)]

What is the RMD failure penalty under SECURE 2.0?

SECURE 2.0 reduced the RMD failure penalty from 50% to 25% of the amount not distributed. If the failure is corrected within the correction window (2 years), the penalty is further reduced to 10%. The correction window begins on the date the penalty is assessed. File Form 5329 to report and pay the penalty, or to claim the reasonable cause exception. [IRC §4974]

How do I abate the RMD failure penalty?

To request abatement: (1) take the missed RMD as soon as possible; (2) file Form 5329 reporting the penalty; (3) attach a statement explaining the reasonable cause (e.g., reliance on incorrect advice, medical emergency, administrative error); (4) write 'RC' (Reasonable Cause) next to the penalty line. The IRS has been generally lenient with first-time RMD failures with reasonable cause.

What is the excess contribution penalty?

A 6% excise tax applies to excess IRA contributions (contributions above the annual limit or contributions made when ineligible). The penalty continues each year until the excess is withdrawn. To avoid the penalty: withdraw the excess contribution plus earnings before the tax filing deadline (including extensions). After the deadline, the excess can be applied to a future year's contribution limit. [IRC §4973]

What is the SEPP (72(t)) exception to the early distribution penalty?

Substantially Equal Periodic Payments (SEPP) allow penalty-free distributions before age 59½ if payments are made at least annually for the longer of: (1) 5 years; or (2) until the taxpayer reaches age 59½. Three IRS-approved calculation methods: Required Minimum Distribution, Fixed Amortization, and Fixed Annuitization. Modifying the payments before the SEPP period ends triggers retroactive penalties plus interest. [IRC §72(t)(2)(A)(iv)]

IRS Form — Additional Taxes on Qualified Plans

Form 5329 — Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

Form 5329 is used to calculate and report additional taxes on qualified retirement plans and other tax-favored accounts — including the 10% early distribution penalty, the 6% excess contribution penalty, and the 25% RMD failure penalty. For tax professionals, Form 5329 is also the form used to claim exceptions to the 10% early distribution penalty when the 1099-R shows Code 1.

✓ Verified 2026 Form 5329 Penalty Rates

✓ SECURE 2.0 RMD Penalty Reduction Confirmed

✓ Early Distribution Exception Codes Confirmed

✓ Excess Contribution Rules Confirmed

10%

Early Distribution Penalty — Waived with Exception

25%

RMD Failure Penalty (Reduced from 50% by SECURE 2.0)

Excess Contribution Penalty — Per Year Until Corrected

IRC §72(t)

Early Distribution Penalty Authority

Key Rules and Authority

Rule	Detail
Early Distribution Penalty	10% of taxable distribution
RMD Failure Penalty	25% (10% if corrected within 2 years)
Excess Contribution Penalty	6% per year until corrected
SEPP Exception	Code 01 — substantially equal periodic payments
Disability Exception	Code 03
Higher Education Exception	Code 08 — IRA only

Early Distribution Penalty Exceptions — Quick Reference

Exception Code	Description	IRA?	401(k)?
01	Substantially equal periodic payments (SEPP/72(t))	Yes	Yes
02	Age 55 separation from service	No	Yes
03	Disability	Yes	Yes
04	Death	Yes	Yes
05	Medical expenses exceeding 7.5% AGI	Yes	Yes
08	Higher education expenses	Yes	No
09	First-time home purchase ($10,000 lifetime)	Yes	No
12	Birth or adoption ($5,000)	Yes	Yes

Frequently Asked Questions

My client missed their RMD for 2025. What is the penalty and can it be waived?

Under SECURE 2.0, the penalty for missing an RMD was reduced from 50% to 25% of the amount not distributed. If the client corrects the shortfall within the "correction window" (generally 2 years), the penalty is further reduced to 10%. To request a penalty waiver, file Form 5329 and attach a statement explaining the reasonable cause for the failure. The IRS has historically been lenient in waiving the RMD penalty for first-time failures with reasonable cause — common accepted reasons include: reliance on incorrect advice from the plan administrator, illness, or administrative error. The client must take the missed RMD as soon as possible and report it on the current year's return.

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Form 5329 — Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

Key Rules and Authority

Early Distribution Penalty Exceptions — Quick Reference

Frequently Asked Questions

Master Retirement Penalty Abatement for Your Clients

Related Resources

Free Access for Tax Professionals

Form 5329 — Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

Key Rules and Authority

Early Distribution Penalty Exceptions — Quick Reference

Frequently Asked Questions

Master Retirement Penalty Abatement for Your Clients

Related Resources