The early withdrawal penalty on retirement accounts goes on Line 23 of Form 1040, after you calculate it on Form 5329 and carry the amount through Schedule 2. A different penalty, the one banks charge when you cash in a CD early, is not a tax at all but a deduction, and it goes on Line 10 of Form 1040 by way of Schedule 1. Where the early withdrawal penalty goes on your 1040 depends entirely on which of these two situations you are in.
The 10% Retirement Penalty: Line 23
If you pulled money from an IRA, 401(k), or similar plan before age 59 1/2, the IRS generally adds a 10% tax on top of the regular income tax on that distribution.1Internal Revenue Service. Substantially Equal Periodic Payments – Section: 1. Is there an additional tax on early distributions from certain retirement plans? You’ll usually spot it first on Form 1099-R: Box 7 marked with Code 1 signals an early distribution that may be subject to the extra tax.2Internal Revenue Service. IRS Instructions for Form 5329 – Section: Who Must File
You calculate the actual amount owed on Form 5329, which also lets you apply any exceptions.3Internal Revenue Service. IRS Instructions for Form 5329 – Section: Purpose of Form The result flows to Schedule 2 and then lands on Line 23 of Form 1040, in the other taxes section.4Internal Revenue Service. IRS Line-by-Line Instructions for Free File Fillable Forms – Section: Line 23 It adds to your tax; it does not reduce your income.
The CD Early Withdrawal Penalty: Line 10
A penalty your bank charged for breaking a CD or other time deposit works the opposite way. It’s a deduction from income, not an added tax. You’ll find the amount in Box 2 of Form 1099-INT or Box 3 of Form 1099-OID.5Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID – Section: Box 2. Early Withdrawal Penalty6Internal Revenue Service. IRS Publication 550 – Section: Penalty on early withdrawal of savings7Internal Revenue Service. IRS Line-by-Line Instructions for Free File Fillable Forms – Section: Line 10
Don’t Confuse the Penalty Line With the Income Line
The penalty and the distribution itself go in different places on the same return. The taxable amount of an IRA distribution goes on lines 4a and 4b. Pensions, annuities, and most other retirement plans go on lines 5a and 5b. Box 1 of Form 1099-R shows the gross distribution; Box 2a shows the taxable portion.8Internal Revenue Service. IRS Form 1040 Instructions – Section: Lines 5a, 5b, and 5c The 10% is separate and reaches the return only through Form 5329 and Schedule 2.
One boundary worth noting: the 10% applies only to the taxable portion. A return of your own nondeductible contributions, your basis, isn’t hit by the extra tax.9Internal Revenue Service. IRS Publication 17 – Section: Total Support
When the Retirement Penalty Can Be Waived
Form 5329 is also where you claim an exception that reduces or eliminates the 10%. You enter the amount that qualifies and a two-digit code, such as Code 03 for disability or Code 08 for higher education. Common exceptions include:10Internal Revenue Service. IRS Instructions for Form 5329 – Section: Exceptions to the Additional Tax on Early Distributions
- Distributions after the account holder’s death, or due to total and permanent disability.
- Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
- Qualified higher education expenses (IRAs only).
- A first-time home purchase, up to a $10,000 lifetime limit (IRAs only).
- Distributions to military reservists called to active duty for at least 180 days.
If an exception covers the full withdrawal, nothing lands on Line 23. If it covers part, only the remainder flows through Schedule 2.