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Publication 590-B

What Acts Result in Penalties or Additional Taxes?(p22)

The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.
There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required.
This chapter discusses those acts (relating to distributions) that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you do not avoid those acts.

Prohibited Transactions(p22)

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are some examples of prohibited transactions with a traditional IRA.
If your IRA invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your IRA may be increased.


For these purposes, a fiduciary includes anyone who does any of the following.

Effect on an IRA account.(p22)

Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.

Effect on you or your beneficiary.(p22)

If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Distributions Taxable?, earlier. The distribution may be subject to additional taxes or penalties.
Borrowing on an annuity contract.(p22)
If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions, discussed later.
Pledging an account as security.(p22)
If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later.

Trust account set up by an employer or an employee association.(p23)

Your account or annuity does not lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction.
Owner participation.(p23)
If you participate in the prohibited transaction with your employer or the association, your account is no longer treated as an IRA.

Taxes on prohibited transactions.(p23)

If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected.
Loss of IRA status.(p23)
If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary are not liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on you or your beneficiary, earlier.

Exempt Transactions(p23)

The following two types of transactions are not prohibited transactions if they meet the requirements that follow.

Payments of cash, property, or other consideration.(p23)

Even if a sponsor makes payments to you or your family, there is no prohibited transaction if all three of the following requirements are met.
  1. The payments are for establishing a traditional IRA or for making additional contributions to it.
  2. The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries.
  3. During the year, the total fair market value of the payments you receive is not more than:
    1. $10 for IRA deposits of less than $5,000, or
    2. $20 for IRA deposits of $5,000 or more.
If the consideration is group term life insurance, requirements (1) and (3) do not apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA.

Services received at reduced or no cost.(p23)

Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met.

Investment in Collectibles(p23)

If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.
Any amounts that were considered to be distributed when the investment in the collectible was made, and which were included in your income at that time, are not included in your income when the collectible is actually distributed from your IRA.


These include:
Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Early Distributions(p24)

You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

Early distributions defined.(p24)

Early distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 591/2, or amounts you receive when you cash in retirement bonds before you are age 591/2.

Age 591/2 Rule(p24)

Generally, if you are under age 591/2, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 591/2 are called early distributions.
The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.
A number of exceptions to this rule are discussed later under Exceptions. Also see Contributions Returned Before Due Date of Return in chapter 1 of Pub. 590-A.
You may have to pay a 25%, rather than a 10%, additional tax if you receive distributions from a SIMPLE IRA before you are age 591/2. See Distributions (Withdrawals) in chapter 3 of Pub. 560.

After age 591/2 and before age 701/2.(p24)

After you reach age 591/2, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 591/2, distributions are not required until you reach age 701/2. See When Must You Withdraw Assets? (Required Minimum Distributions), earlier.


There are several exceptions to the age 591/2 rule. Even if you receive a distribution before you are age 591/2, you may not have to pay the 10% additional tax if you are in one of the following situations. Most of these exceptions are explained below.
Note.Distributions that are timely and properly rolled over, as discussed in chapter 1 of Pub. 590-A, are not subject to either regular income tax or the 10% additional tax. Certain withdrawals of excess contributions after the due date of your return are also tax free and therefore not subject to the 10% additional tax. (See Excess Contributions Withdrawn After Due Date of Return, in chapter 1 of Pub. 590-A.) This also applies to transfers incident to divorce, as discussed under Can You Move Retirement Plan Assets? in chapter 1 of Pub. 590-A.
Receivership distributions.(p24)
Early distributions (with or without your consent) from savings institutions placed in receivership are subject to this tax unless one of the above exceptions applies. This is true even if the distribution is from a receiver that is a state agency.

Unreimbursed medical expenses.(p24)

Even if you are under age 591/2, you do not have to pay the 10% additional tax on distributions that are not more than: You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A (Form 1040). You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.
Adjusted gross income.(p24)
This is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37.

Medical insurance.(p24)

Even if you are under age 591/2, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply.


If you become disabled before you reach age 591/2, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax.
You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.


If you die before reaching age 591/2, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax.
However, if you inherit a traditional IRA from your deceased spouse and elect to treat it as your own (as discussed under What if You Inherit an IRA?, earlier), any distribution you later receive before you reach age 591/2 may be subject to the 10% additional tax.


You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 591/2. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The "required minimum distribution method," when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.
There are two other IRS-approved distribution methods that you can use. They are generally referred to as the "fixed amortization method" and the "fixed annuitization method." These two methods are not discussed in this publication because they are more complex and generally require professional assistance. For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at
Recapture tax for changes in distribution method under equal payment exception.(p25)
You may have to pay an early distribution recapture tax if, before you reach age 591/2, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that would not have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period.
You may have to pay the recapture tax if you do not receive the payments for at least 5 years under a method that qualifies for the exception. You may have to pay it even if you modify your method of distribution after you reach age 591/2. In that case, the tax applies only to payments distributed before you reach age 591/2.
Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Do not write the explanation next to the line or enter any amount for the recapture on lines 1 or 3 of the form.
One-time switch.(p25)
If you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time without incurring the additional tax. Once a change is made, you must follow the required minimum distribution method in all subsequent years.

Higher education expenses.(p25)

Even if you are under age 591/2, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution (defined below). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.
When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds. Do not include expenses paid with any of the following funds.
Qualified higher education expenses.(p25)
Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.
Eligible educational institution.(p25)
This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
For more information, see chapter 9 of Pub. 970.

First home.(p26)

Even if you are under age 591/2, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.
  1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the day you received it.
  2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined below) who is any of the following.
    1. Yourself.
    2. Your spouse.
    3. Your or your spouse's child.
    4. Your or your spouse's grandchild.
    5. Your or your spouse's parent or other ancestor.
  3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.
Qualified acquisition costs.(p26)
Qualified acquisition costs include the following items.
First-time homebuyer.(p26)
Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.
Date of acquisition.(p26)
The date of acquisition is the date that:
If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you generally can contribute the amount of the distribution to an IRA within 120 days of the distribution. This contribution is treated as a rollover contribution to the IRA.

Qualified reservist distributions.(p26)

A qualified reservist distribution is not subject to the additional tax on early distributions.
A distribution you receive is a qualified reservist distribution if the following requirements are met.
Reserve component.(p26)
The term "reserve component" means the:

Additional 10% tax(p26)

The additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income.
Use Form 5329 to figure the tax. See the discussion of Form 5329, later, under Reporting Additional Taxes for information on filing the form.


Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom does not meet any of the exceptions to the 10% additional tax, so the $3,000 is an early distribution. Tom never made any nondeductible contributions to his IRA. He must include the $3,000 in his gross income for the year of the distribution and pay income tax on it. Tom must also pay an additional tax of $300 (10% × $3,000). He files Form 5329. See the filled-in Form 5329, later.
Early distributions of funds from a SIMPLE retirement account made within 2 years of beginning participation in the SIMPLE are subject to a 25%, rather than a 10%, early distributions tax.

Nondeductible contributions.(p26)

The tax on early distributions does not apply to the part of a distribution that represents a return of your nondeductible contributions (basis).

Excess Accumulations (Insufficient Distributions)(p27)

You cannot keep amounts in your traditional IRA (including SEP and SIMPLE IRAs) indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 701/2. The required minimum distribution for any year after the year in which you reach age 701/2 must be made by December 31 of that later year.
Tax on excess.(p27)
If distributions are less than the required minimum distribution for the year, discussed earlier under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required.

Reporting the tax.(p27)

Use Form 5329 to report the tax on excess accumulations. See the discussion of Form 5329, later, under Reporting Additional Taxes, for more information on filing the form.

Request to waive the tax.(p27)

If the excess accumulation is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of tax in the Instructions for Form 5329.

Exemption from tax.(p27)

If you are unable to take required distributions because you have a traditional IRA invested in a contract issued by an insurance company that is in state insurer delinquency proceedings, the 50% excise tax does not apply if the conditions and requirements of Revenue Procedure 92-10 are satisfied. Those conditions and requirements are summarized below. Revenue Procedure 92-10 is in Cumulative Bulletin 1992-1. You can read the revenue procedure at most IRS offices, at many public libraries, and online at
To qualify for exemption from the tax, the assets in your traditional IRA must include an affected investment. Also, the amount of your required distribution must be determined as discussed earlier under When Must You Withdraw Assets? (Required Minimum Distributions).
Affected investment defined.(p27)
Affected investment means an annuity contract or a guaranteed investment contract (with an insurance company) for which payments under the terms of the contract have been reduced or suspended because of state insurer delinquency proceedings against the contracting insurance company.
If your traditional IRA (or IRAs) includes assets other than your affected investment, all traditional IRA assets, including the available portion of your affected investment, must be used to satisfy as much as possible of your IRA distribution requirement. If the affected investment is the only asset in your IRA, as much of the required distribution as possible must come from the available portion, if any, of your affected investment.
Available portion.(p29)
The available portion of your affected investment is the amount of payments remaining after they have been reduced or suspended because of state insurer delinquency proceedings.
Make up of shortfall in distribution.(p29)
If the payments to you under the contract increase because all or part of the reduction or suspension is canceled, you must make up the amount of any shortfall in a prior distribution because of the proceedings. You make up (reduce or eliminate) the shortfall with the increased payments you receive.
You must make up the shortfall by December 31 of the calendar year following the year that you receive increased payments.

Reporting Additional Taxes(p29)

Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess accumulations. If you must file Form 5329, you cannot use Form 1040A, Form 1040EZ, or Form 1040NR-EZ.

Filing a tax return.(p29)

If you must file an individual income tax return, complete Form 5329 and attach it to your Form 1040 or Form 1040NR. Enter the total additional taxes due on Form 1040, line 59, or on Form 1040NR, line 57.

Not filing a tax return.(p29)

If you do not have to file a return, but do have to pay one of the additional taxes mentioned earlier, file the completed Form 5329 with the IRS at the time and place you would have filed Form 1040 or Form 1040NR. Be sure to include your address on page 1 and your signature and date on page 2. Enclose, but do not attach, a check or money order payable to the United States Treasury for the tax you owe, as shown on Form 5329. Write your social security number and "2016 Form 5329" on your check or money order.
Form 5329 not required.(p29)
You do not have to use Form 5329 if either of the following situations exists.