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Apply excess-contribution, early-distribution, and prohibited-transaction penalties and exceptions
Retirement tax benefits come with limits: contributions above the limit, withdrawals before age 59 1/2, and personal use of the account all draw extra taxes. Each has its own rate, its own trigger, and its own exceptions. This lesson teaches the 6% excise on excess contributions, the 10% tax on early distributions, the exceptions that lift the 10% tax, and the prohibited-transaction rules that treat personal use as a distribution.
An excess contribution is any amount contributed beyond the limit for the year. Leaving it in place triggers a 6% excise tax for the year, figured on Form 5329. The fix is a complete withdrawal: the excess plus any interest or other income earned on it, taken out by the return due date, extensions included, draws no 6% tax for that contribution, provided no deduction was allowed for the withdrawn excess. The withdrawn earnings are included in gross income for the contribution year, and where the owner is under 59 1/2 at withdrawal they are also reported as an early distribution. The deadline applies separately to each tax year, so each year's excess is tested against that year's return due date, including extensions.
Beth's 2025 limit accommodates everything except $3,000, which stays in the account. The excise for the year is \(3{,}000 \times 6\%\) and the additional tax is $180. Had she pulled the $3,000 plus any earnings out by her return due date including extensions, with no deduction allowed for it, no 6% tax would attach to that contribution.
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it is subject to a 6% excise taxView on the source
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You won’t have to pay the 6% tax if any 2024 excess contribution was withdrawn by April 15, 2025 (including extensions)View on the source
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You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.View on the source
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You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made.View on the source
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No deduction was allowed for the excess contribution.View on the source
Form 5329 Instructions Page 7
You withdraw any earnings on the withdrawn contributions and include the earnings in gross income (see the Instructions for Form 8606 for details).View on the source
Form 5329 Instructions Page 7
Also, if you hadn't reached age 591/2 at the time of the withdrawal, include the earnings as an early distribution on line 1 of Form 5329 for the year in which you report the earnings.View on the source
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The additional tax is figured on Form 5329.View on the source
Dana, 45, earned $40,000 of taxable compensation in 2025 and contributed $7,600 to her traditional IRA. She claims no deduction for the extra $600 and leaves it in the account on December 31. What excise does she owe for 2025?
The age threshold is 59 1/2. Most distributions taken before reaching it, from traditional IRAs and from qualified plans alike, draw a 10% additional tax on the part included in gross income, on top of the regular income tax. A SIMPLE IRA keeps its own rate within its first 2 years: a distribution received within 2 years from the date the owner first participated in the SIMPLE plan draws a 25% additional tax instead of 10%, on the same includible part. The tax is computed on Form 5329, unless the payer already coded the distribution correctly and the full amount is reported on Schedule 2 of Form 1040. Tax-free portions stay outside the 10%: returned cost, completed rollovers, and corrective distributions of excess deferrals or contributions do not draw it.
Lena, 45, takes a $14,000 taxable 401(k) distribution to buy a car. The full $14,000 is includible and no exception fits a car purchase, so the additional tax is \(14{,}000 \times 10\%\) and the extra tax is $1,400 plus her regular income tax on the $14,000. A $14,000 distribution that was entirely a tax-free return of cost would draw no 10% tax at all.
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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.View on the source
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Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 591/2 are subject to an additional tax of 10%.View on the source
Form 5329 Instructions Page 5
If any amount on line 3 was a distribution from a SIMPLE IRA received within 2 years from the date you first participated in the SIMPLE IRA plan, you must multiply that amount by 25% instead of 10%.View on the source
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If you must pay either of these taxes, report them on Form 5329. However, you don’t have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows code “1” in box 7. Instead, enter 10% of the taxable part of the distribution on Schedule 2 (Form 1040), line 8.View on the source
Tom, 35, receives a $3,000 taxable distribution from his traditional IRA and meets no exception. What additional tax does he owe on it, apart from regular income tax?
Exceptions lift the 10% tax without changing the income tax. The most commonly tested exceptions are these. Qualifying unreimbursed medical costs above 7.5% of AGI exempt distributions up to that excess, from an IRA or from a qualified plan, with no itemizing required. A domestic-abuse distribution meeting its conditions escapes the 10% tax, as does an emergency-personal-expense distribution meeting its conditions, limited to one per year and no more than the smaller of $1,000 or the IRA balance minus $1,000. The first-time homebuyer exception is IRA-only: it covers any IRA, Roth included, up to a $10,000 lifetime limit reduced by prior qualified distributions, so a 401(k) withdrawal for the same house does not qualify. The higher-education exception is likewise IRA-only, sheltering IRA distributions up to the year's qualified higher education expenses for the owner, spouse, or their children or grandchildren. Distributions taken as a series of substantially equal periodic payments escape the tax.
The age-55 separation exception is the qualified-plan counterpart to those IRA-only rules. A distribution from a qualified plan after the employee separates from service in or after the year they reach age 55 escapes the 10% tax; for qualified public safety employees the age is 50, or 25 years of service under the plan if earlier. The separation itself must come in or after that year: an employee who leaves at 49 and waits until 55 to withdraw does not qualify. The exception does not reach IRAs, so rolling the plan balance into an IRA and withdrawing from the IRA at 56 loses it.
Less-tested exceptions round out the list. IRA-only: distributions up to the medical insurance premiums paid for yourself, your spouse, and your dependents after losing a job and receiving unemployment compensation for 12 consecutive weeks. From an IRA or a plan: distributions due to an IRS levy.A qualified birth-or-adoption distribution taken within a year of the birth or finalized adoption, up to $5,000 per taxpayer, and a qualified reservist distribution taken during the qualifying active-duty window also escape the tax. So do distributions made because of total and permanent disability or a certified terminal illness, and distributions to a beneficiary after the owner's death. The test stays the same throughout: early, includible, and outside every listed exception means the tax applies.
| Purpose | Covers | Limit |
|---|---|---|
| Medical costs | IRA and qualified-plan distributions | Qualifying expenses above 7.5% of AGI |
| First home | Any IRA (Roth included) | $10,000 lifetime limit reduced by prior qualified amounts |
| Domestic abuse | IRA and plan distributions | Stated conditions must be met |
| Emergency need | IRA and plan distributions | One per year; the smaller of $1,000 or the IRA balance minus $1,000 |
| Birth or adoption | Eligible retirement plans | Within a year of birth or finalized adoption; $5,000 per taxpayer |
| Reservist on active duty | IRA and elective-deferral amounts | Call-up of more than 179 days or indefinite; distribution during the active-duty window |
| Higher education | IRA only | Up to the year's qualified expenses |
| Substantially equal payments | IRA and plan distributions | Series of substantially equal periodic payments |
| Separation from service at 55 | Qualified plan only, not IRAs | Separation in or after the year of reaching 55 (50 for public safety) |
| Health insurance while unemployed | IRA only | Premiums paid after 12 consecutive weeks of unemployment compensation |
| IRS levy | IRA and plan distributions | Distribution made because of the levy |
Omar, 50, has AGI of $100,000, so his 7.5% floor is $7,500. With $12,000 of qualifying unreimbursed medical expenses and a $12,000 IRA distribution, $4,500 of the distribution escapes the 10% tax and the rest remains subject to it. Angela, 35, takes a $10,000 IRA withdrawal for her first home: with no prior qualified distributions, the full $10,000 escapes the 10% tax, while the same withdrawal from her 401(k) does not.
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you don’t have to pay the 10% additional tax on distributions from your IRA up to the amount by which those qualifying medical expenses exceed 7.5% of your adjusted gross incomeView on the source
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Do not enter more than $10,000 reduced by the total of all your prior qualified first-time homebuyer distributionsView on the source
Form 5329 Instructions Page 5
IRA distributions made for the purchase of a first home, up to $10,000.View on the source
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You don't have to itemize your deductions to take advantage of this exception to the 10% additional tax.View on the source
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Beginning with distributions made after December 31, 2023, a distribution to a domestic abuse victim is not subject to the 10% additional tax on early distributions if the distribution meets certain requirements.View on the source
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Beginning with distributions made after December 31, 2023, a distribution to an individual for certain emergency personal expenses is not subject to the 10% additional tax on early distributions if certain requirements are met.View on the source
Form 5329 Instructions Page 5
IRA distributions made for qualified higher education expenses.View on the source
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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.View on the source
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The education must be for you, your spouse, or the children or grandchildren of you or your spouse.View on the source
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You are totally and permanently disabled. • You have been certified as having a terminal illness. • You are the beneficiary of a deceased IRA owner. • You are receiving distributions in the form of a series of substantially equal periodic payments.View on the source
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From a qualified retirement plan to the extent you have deductible medical expenses that exceed 7.5% of your AGI, whether or not you itemize your deductions for the year;View on the source
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A qualified birth or adoption distribution is any distribution from an applicable eligible retirement plan if made during the 1-year period beginning on the date on which your child was born or the date on which the legal adoption of your child was finalized.View on the source
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A qualified birth or adoption distribution must not exceed $5,000 per taxpayer.View on the source
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A qualified reservist distribution isn't subject to the 10% additional tax on early distributions.View on the source
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You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component.View on the source
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An emergency personal expense distribution is a distribution from an applicable eligible retirement plan for the purposes of meeting the unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.View on the source
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You are limited to taking one emergency personal expense distribution per calendar year and the amount that may be treated as an emergency personal expense distribution must not exceed the lesser of $1,000 or your total interest in the IRA minus $1,000.View on the source
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Additional exceptions for qualified retirement plans. The 10% additional tax doesn’t apply to distributions that are: • From a qualified retirement plan after your separation from service in or after the year you reached age 55 (the earlier of age 50 or 25 years of service under the plan for qualified public safety employees) (see Separation from service, later);View on the source
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Example. George separated from service from his employer at age 49. In the year he reached age 55, he took a distribution from his retirement plan. Because he separated from service before he reached age 55, he didn’t meet the requirements for the exception for a distribution made from a qualified retirement plan after separating from service in or after reaching age 55.View on the source
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Medical insurance. 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. • You lost your job. • You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.View on the source
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• The distribution is due to an IRS levy of the IRA.View on the source
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• From a qualified retirement plan due to an IRS levy of the plan;View on the source
Which IRA distribution for education is excepted from the 10% additional tax?
A prohibited transaction is any improper use of the IRA account or annuity by the owner, the beneficiary, or any disqualified person. Disqualified persons are the fiduciary and members of the family: spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. Four examples are: borrowing money from the IRA, selling property to it, using it as security for a loan, and buying property for personal use with IRA funds. Personal use ends the IRA's tax benefit. Using IRA assets as security for a loan treats only the pledged part as a distribution in the pledge year, included in income and exposed to the early-distribution tax when the age threshold is unmet. Borrowing from the IRA, by contrast, is itself a prohibited transaction by the owner: the whole account stops being an IRA as of January 1 of that year, and its entire value is treated as distributed at fair market value on that date. If the owner has more than one IRA, only the IRA involved loses its status. IRA money put into collectibles such as antique rugs is another trigger, not an exception: the amount invested is treated as distributed in the year invested and can draw the early tax when the age threshold is unmet. When someone other than the owner or beneficiary engages in a prohibited transaction, the stated excise is 15% of the amount with a 100% additional tax while it stays uncorrected. When the owner personally triggers loss of IRA status, the account stops being an IRA and distribution consequences follow.
Victor pledges $9,000 of his $50,000 IRA as loan collateral and takes nothing out. The $9,000 is treated as distributed that year and included in his income. At 45 with no exception, the $9,000 also draws the 10% additional tax. Had Victor instead borrowed $9,000 from the same IRA, the loan would be a prohibited transaction: the account stops being an IRA as of January 1, and the whole $50,000 is treated as distributed (taxable to the extent above his basis) and exposed to the 10% tax. Had a disqualified person other than the owner engaged in a prohibited transaction of the same size and left it uncorrected, the excise would be \(9{,}000 \times 15\%\) ($1,350) plus a $9,000 second-tier tax (100% of the amount) while it stays uncorrected.
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If you use a part of your IRA account as security for a loan, that part is treated as a distribution and is included in your gross income.View on the source
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In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction isn't correctedView on the source
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Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.View on the source
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Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).View on the source
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Borrowing money from it. • Selling property to it. • Using it as security for a loan. • Buying property for personal use (present or future) with IRA funds.View on the source
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If your 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.View on the source
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Collectibles. These include: • Artworks, • Rugs, • Antiques,View on the source
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Effect on an IRA account. 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. However, if you own more than one IRA, each IRA is treated as a separate account, and loss of IRA status only affects that IRA that participated in the prohibited transaction.View on the source
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Effect on you or your beneficiary. 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.View on the source
Which act is a prohibited transaction, and what follows from it?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.