Early retirement distributions are an IRS red flag. The agency wants to make sure that individuals are properly reporting distributions from IRAs and qualified employer plans, such as 401(k)s, that are withdrawn before age 59½. An IRS review from a number of years ago found that 40% of people scrutinized made mistakes, with most of those errors coming from taxpayers who didn't qualify for one of the numerous exceptions to the additional excise tax on early distributions.
A 10% excise tax hits most pre-age-59 ½ withdrawals from IRAs, 401(k)s and certain other retirement accounts. This penalty on early distributions is in addition to any regular income tax that is due on the payout. A Department of Treasury inspectors' report found that 2.8 million taxpayers who received early distributions totaling $12.9 billion in 2021 didn't pay the 10% additional tax.
