Reporting Early Withdrawals: Form 1099-R, Form 5329, and the 10% Penalty

To report an early 401(k) withdrawal on your taxes, transfer the numbers from Form 1099-R (which your plan administrator sends you by January 31) onto lines 5a and 5b of Form 1040, then file Form 5329 to either calculate the 10% additional tax or claim an exception that eliminates it. IRA withdrawals follow the same process but use lines 4a and 4b instead. The IRS receives its own copy of every 1099-R and matches it against your return automatically, so the numbers and codes have to line up.

Read Your 1099-R First

Three boxes on Form 1099-R drive everything that follows on your return.¹

Box 1 shows the gross distribution, meaning the full amount withdrawn before any taxes were held back.
Box 2a shows the taxable portion. This equals Box 1 unless your account held after-tax contributions, in which case Box 2a will be smaller.
Box 7 contains a one- or two-character distribution code that tells the IRS why the money came out.

For an early withdrawal, the two codes you’ll usually see are Code 1 and Code 2. Code 1 means the custodian identified no exception, so the 10% additional tax applies unless you claim one yourself on Form 5329. Code 2 means the custodian has already flagged a qualifying exception, and typically no Form 5329 is needed. Code G indicates a direct rollover to another plan, which is not a taxable event.¹

Where the Numbers Go on Your Return

A 401(k) distribution is reported on lines 5a and 5b of Form 1040: the gross amount on 5a and the taxable amount on 5b. IRA distributions use lines 4a and 4b instead.² If the entire distribution is taxable, you can skip 4a or 5a and enter the full figure on 4b or 5b. If any portion was rolled over into another retirement account, report the total on the “a” line and only the taxable piece on the “b” line.

The IRS matches these entries directly to the 1099-R already on file. A mismatch usually produces a CP2000 notice proposing additional tax plus interest, so the safe practice is to enter the figures exactly as they appear on the form.³

The 10% Additional Tax and How Form 5329 Handles It

Section 72(t) of the tax code adds a 10% tax to the taxable portion of any distribution taken before age 59½, unless a specific exception applies.⁴ This is on top of regular income tax. Someone in the 22% bracket who pulls $20,000 out early with no exception owes roughly $4,400 in income tax plus $2,000 in penalty, for a combined bite of about 32%.

SIMPLE IRAs carry a higher 25% rate for distributions taken within the first two years of plan participation. After the two-year window closes, the standard 10% rate applies.⁵

Part I of Form 5329 is where you calculate the tax or document an exception:

Line 1 is the taxable amount from Box 2a of your 1099-R. Combine multiple early distributions if you had more than one.
Line 2 is the portion that qualifies for an exception, entered with the appropriate two-digit exception code.
Line 3 is line 1 minus line 2, which is the amount still subject to the additional tax.
Line 4 multiplies line 3 by 10% (or 25% for early SIMPLE IRA distributions). The result flows to Schedule 2 of your 1040.⁶

File Form 5329 even when your exception zeros out the tax. That form is how the IRS knows you’re claiming one; without it, the agency has only the Code 1 on your 1099-R to go by. Each spouse who took an early distribution files a separate 5329, and the totals combine on one Schedule 2.⁶

Exceptions That Remove the Penalty

More than 20 statutory exceptions eliminate the 10% additional tax in specific situations. Some work for any retirement account, others only for IRAs, and a few only for employer-sponsored plans.⁷ The ones that come up most often on 401(k) withdrawals:

Separation from service at or after age 55. If you leave your job during or after the calendar year you turn 55, distributions from that employer’s plan are penalty-free. Public safety employees qualify starting at age 50 or after 25 years of service, whichever is earlier. This applies only to the plan of the employer you left, not to IRAs or to plans from other employers.

Medical expenses. The portion of a distribution that covers unreimbursed medical expenses exceeding 7.5% of your adjusted gross income is exempt. You don’t have to itemize to use this exception. Only the amount above the 7.5% threshold qualifies; the rest still gets the penalty.

Disability. If you’re totally and permanently disabled, meaning a physician has determined that a physical or mental condition prevents any substantial gainful activity and will either result in death or last indefinitely, distributions from any account are penalty-free. Keep the physician’s written determination with your records.

Death. Distributions to a beneficiary after the account owner dies are exempt from the 10% penalty regardless of the beneficiary’s age. Regular income tax still applies (except on qualified Roth distributions).

Substantially equal periodic payments. You can take penalty-free withdrawals at any age by committing to a series of substantially equal periodic payments based on life expectancy, using one of three IRS-approved calculation methods. Once started, the payments generally can’t be changed until the later of five years or your reaching 59½, or the IRS retroactively imposes the penalty on every payment taken under the arrangement plus interest.⁸

Higher education and first-time home purchase. These two exceptions apply only to IRA distributions, not to 401(k) or other employer-plan distributions. Qualified higher education expenses for you, your spouse, children, or grandchildren are exempt without a dollar cap. First-time homebuyers can withdraw up to $10,000 lifetime, where “first-time” means no principal residence ownership in the past two years.⁶

The SECURE 2.0 Act added several newer exceptions for distributions taken after December 31, 2023: emergency personal expenses up to $1,000 once per calendar year, distributions of up to $10,000 (indexed) for domestic abuse victims, terminal illness certified by a physician, and up to $22,000 per federally declared disaster for people who suffered economic loss in the affected area.⁷

Common Exception Codes for Line 2

On Form 5329, line 2 requires a two-digit code identifying the exception. Frequently used codes include 03 for total and permanent disability, 04 for death of the account owner, 05 for medical expenses over 7.5% of AGI, 08 for higher education expenses, 09 for first-time homebuyer, 10 for separation from service after age 55, and 12 if the 1099-R incorrectly showed an early distribution when in fact none applied.⁶

Roth Withdrawals Work Differently

Roth IRA distributions follow an ordering rule: contributions come out first, then conversions, then earnings. Your original contributions can be withdrawn at any age without tax or penalty because you already paid tax on that money. Only the earnings portion is subject to income tax and the 10% penalty when withdrawn early, and even earnings escape both once the account is at least five years old and you’ve reached 59½. The exceptions above apply to any taxable Roth amount that isn’t a qualified distribution.

When the 1099-R Is Wrong

If Box 7 shows Code 1 but you actually qualified for an exception, or the taxable amount looks off, contact the payer first and ask for a corrected form. If the payer won’t cooperate, the IRS will contact them on your behalf if you call 800-829-1040.⁹

If a corrected 1099-R won’t arrive before the filing deadline, you have two paths. You can file using Form 4852 as a substitute, estimating the correct figures from your own records.¹⁰ Or you can file with the original Code 1 in place and claim the exception yourself on Form 5329, using exception code 12 in the case where the 1099-R incorrectly indicated an early distribution.⁶ If a corrected form shows up later and changes the numbers, amend the return with Form 1040-X.

Rollovers and the 20% Withholding Trap

When a 401(k) distribution could have been rolled over but was paid to you instead of directly transferred to another retirement account, the plan administrator must withhold 20% for federal taxes. You can’t waive this withholding.¹¹

This creates a problem for 60-day rollovers. Say you withdraw $50,000 from a 401(k) planning to move it to an IRA. The plan holds back $10,000, and you receive $40,000. If you deposit only the $40,000 into the new account within 60 days, the missing $10,000 is treated as a taxable distribution and can trigger the 10% penalty if you’re under 59½. To roll over the full $50,000, you’d have to make up the withheld $10,000 out of other funds, then recover it when you file your return as taxes already paid.¹²

When you complete a valid 60-day rollover, the old custodian still issues a 1099-R for the gross amount. You report the gross on line 5a (or 4a for IRAs) and enter the taxable portion (often zero) on 5b (or 4b), writing “Rollover” next to the line. For IRA-to-IRA rollovers of this indirect type, only one is allowed per 12-month period across all your IRAs combined. Direct trustee-to-trustee transfers, rollovers from an employer plan to an IRA, and Roth conversions don’t count toward that limit.¹²

Filing and Records

Form 5329 is filed as an attachment to your Form 1040 by the regular filing deadline, including extensions. Most tax software generates it automatically when you enter your 1099-R information. On a paper return, place the 5329 directly behind the 1040 and any schedules.¹³

In the unusual case where you owe only the 10% additional tax and your income is below the filing threshold, Form 5329 can be filed on its own. A standalone 5329 must be mailed on paper (it can’t be e-filed) with your address on page 1 and your signature on page 3.⁶

Keep documentation supporting any exception you claim for at least three years, which is the general period the IRS has to assess additional tax.¹⁴ Medical bills, tuition statements, closing documents on a first home, a physician’s disability determination, or an unemployment record for the health insurance exception are the kind of records the agency asks for if it questions your claim. Also hold onto copies of every Form 5329 you file. They document which exceptions you’ve used and for how much, which matters for lifetime caps like the $10,000 first-time homebuyer limit and for any future SEPP arrangement.

1
Internal Revenue Service. Instructions for Forms 1099-R and 5498
2
Internal Revenue Service. 1040 (2025) Instructions
3
Internal Revenue Service. Understanding Your CP2000 Series Notice
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Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
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Internal Revenue Service. Instructions for Form 5329
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
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Internal Revenue Service. Substantially Equal Periodic Payments
9
Internal Revenue Service. What to Do When a W-2 or Form 1099 Is Missing or Incorrect
10
Internal Revenue Service. Using Form 4852 When Missing the Form W-2 or 1099-R
11
eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions
12
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
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Internal Revenue Service. Instructions for Form 5329 – When and Where To File
14
Internal Revenue Service. Time IRS Can Assess Tax