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IRS.gov Website
Publication 590-B
taxmap/pubs/p590b-005.htm#en_us_publink1000230854

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

rule
The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you don't 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 don't avoid those acts.
taxmap/pubs/p590b-005.htm#en_us_publink1000230855

Prohibited Transactions(p22)

rule
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.
EIC
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230856

Fiduciary.(p22)

rule
For these purposes, a fiduciary includes anyone who does any of the following.
taxmap/pubs/p590b-005.htm#en_us_publink1000230857

Effect on an IRA account.(p22)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230858

Effect on you or your beneficiary.(p22)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230860
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230861
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230862

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

rule
Your account or annuity doesn't lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction.
taxmap/pubs/p590b-005.htm#en_us_publink1000230863
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230864

Taxes on prohibited transactions.(p23)

rule
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 isn't corrected.
taxmap/pubs/p590b-005.htm#en_us_publink1000230865
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 aren't 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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230867

Exempt Transactions(p23)

rule
The following two types of transactions aren't prohibited transactions if they meet the requirements that follow.
taxmap/pubs/p590b-005.htm#en_us_publink1000230868

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

rule
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 isn't 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) don't 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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230869

Services received at reduced or no cost.(p23)

rule
Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met.
taxmap/pubs/p590b-005.htm#en_us_publink1000230870

Investment in Collectibles(p23)

rule
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, aren't included in your income when the collectible is actually distributed from your IRA.
taxmap/pubs/p590b-005.htm#en_us_publink1000230871

Collectibles.(p23)

rule
These include:
taxmap/pubs/p590b-005.htm#en_us_publink1000230872
Exception.(p23)
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.
taxmap/pubs/p590b-005.htm#en_us_publink100072136

Unrelated Business Income(p23)

rule
An IRA is subject to tax on unrelated business income if it carries on an unrelated trade or business. An unrelated trade or business means any trade or business regularly carried on by the IRA or by a partnership of which it is a member, and not substantially related to the IRA’s exempt purpose or function. If the IRA has $1,000 or more of unrelated trade or business gross income, the IRA must file a Form 990-T, Exempt Organization Business Income Tax Return. An IRA trustee is permitted to file Form 990-T on behalf of the IRA. In the case of an IRA that operates on a calendar year, the Form 990-T must be filed by the 15th day of April following the close of the calendar year. In the case of an IRA that operates on a fiscal year, the Form 990-T must be filed by the 15th day of the 4th month following the close of the fiscal year. See Pub. 598 for more information.
taxmap/pubs/p590b-005.htm#en_us_publink1000230896

Early Distributions(p24)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230898

Early distributions defined.(p24)

rule
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.
Deposit
If you were affected by Hurricane Harvey, Irma, or Maria, see chapter 3, Disaster-Related Relief.
taxmap/pubs/p590b-005.htm#en_us_publink1000230899

Age 591/2 Rule(p24)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230903

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

rule
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 aren't required until you reach age 701/2. See When Must You Withdraw Assets? (Required Minimum Distributions), earlier.
taxmap/pubs/p590b-005.htm#en_us_publink1000230905

Exceptions(p24)

rule
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, aren't 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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230909
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230910

Unreimbursed medical expenses.(p24)

rule
Even if you are under age 591/2, you don't have to pay the 10% additional tax on distributions that aren't 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 don't have to itemize your deductions to take advantage of this exception to the 10% additional tax.
taxmap/pubs/p590b-005.htm#en_us_publink1000230911
Adjusted gross income.(p24)
This is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37.
taxmap/pubs/p590b-005.htm#en_us_publink1000230912

Medical insurance.(p24)

rule
Even if you are under age 591/2, you may not have to pay the 10% additional tax on distributions during the year that aren't more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You won't have to pay the tax on these amounts if all of the following conditions apply.
taxmap/pubs/p590b-005.htm#en_us_publink1000230913

Disabled.(p25)

rule
If you become disabled before you reach age 591/2, any distributions from your traditional IRA because of your disability aren't subject to the 10% additional tax.
You are considered disabled if you can furnish proof that you can't 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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230914

Beneficiary.(p25)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230916

Annuity.(p25)

rule
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 aren't 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 www.irs.gov/pub/irs-irbs/irb02-42.pdf.
taxmap/pubs/p590b-005.htm#en_us_publink1000230917
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 wouldn't 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 don't 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. Don't write the explanation next to the line or enter any amount for the recapture on lines 1 or 3 of the form.
taxmap/pubs/p590b-005.htm#en_us_publink1000230918
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230919

Higher education expenses.(p25)

rule
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 isn't 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 isn't subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds. Don't include expenses paid with any of the following funds.
taxmap/pubs/p590b-005.htm#en_us_publink1000230920
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230921
Eligible educational institution.(p26)
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230922

First home.(p26)

rule
Even if you are under age 591/2, you don't 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 can't be more than $10,000.
Deposit
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230924
Qualified acquisition costs.(p26)
Qualified acquisition costs include the following items.
taxmap/pubs/p590b-005.htm#en_us_publink1000230925
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230926
Date of acquisition.(p26)
The date of acquisition is the date that:
Deposit
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.
taxmap/pubs/p590b-005.htm#en_us_publink100076093
Disaster relief.(p26)
If you received a distribution to buy, build, or rebuild a first home, but did not buy, build, or rebuild the home because of Hurricane Harvey, Irma, or Maria, you may be able to repay the distribution and not pay income tax or the 10% additional tax on early distributions. See Repayment of a Qualified Distribution for the Purchase or Construction of a Main Home in chapter 3.
taxmap/pubs/p590b-005.htm#en_us_publink1000230927

Qualified reservist distributions.(p26)

rule
A qualified reservist distribution isn't subject to the additional tax on early distributions.
taxmap/pubs/p590b-005.htm#en_us_publink1000230928
Definition.(p26)
A distribution you receive is a qualified reservist distribution if the following requirements are met.
taxmap/pubs/p590b-005.htm#en_us_publink1000230929
Reserve component.(p26)
The term "reserve component" means the:
taxmap/pubs/p590b-005.htm#en_us_publink1000230930

Additional 10% tax(p26)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230932

Example.(p27)

Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom doesn't 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.
EIC
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230935

Nondeductible contributions.(p27)

rule
The tax on early distributions doesn't apply to the part of a distribution that represents a return of your nondeductible contributions (basis).
taxmap/pubs/p590b-005.htm#en_us_publink1000230936

Excess Accumulations (Insufficient Distributions)(p27)

rule
You can't 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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230938
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230940

Reporting the tax.(p27)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230942

Request to waive the tax.(p27)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230943

Exemption from tax.(p27)

rule
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 doesn't 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 IRS.gov.
taxmap/pubs/p590b-005.htm#en_us_publink1000230945
Conditions.(p27)
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).
taxmap/pubs/p590b-005.htm#en_us_publink1000230947
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230948
Requirements.(p27)
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.
taxmap/pubs/p590b-005.htm#en_us_publink100021871
taxmap/pubs/p590b-005.htm#en_us_publink1000230949
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230950
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230951

Reporting Additional Taxes(p29)

rule
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 can't use Form 1040A, Form 1040EZ, or Form 1040NR-EZ.
taxmap/pubs/p590b-005.htm#en_us_publink1000230952

Filing a tax return.(p29)

rule
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.
taxmap/pubs/p590b-005.htm#en_us_publink1000230953

Not filing a tax return.(p29)

rule
If you don't 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 don't 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 "2017 Form 5329" on your check or money order.
taxmap/pubs/p590b-005.htm#en_us_publink1000230954
Form 5329 not required.(p29)
You don't have to use Form 5329 if any of the following situations exists.