Common use of Early Distribution Penalty Clause in Contracts

Early Distribution Penalty. If you are under the age of 59½ and receive a nonqualified ▇▇▇▇ ▇▇▇ distribution, an additional tax of 10% will generally apply to the amount includible in income. Also, if you are under the age of 59½ and receive a distribution of conversion amounts or employer-sponsored retirement plan rollover amounts (other than amounts attributed to designated ▇▇▇▇ accounts) within the five-year period beginning with the year in which the conversion or employer-sponsored plan rollover occurred, an additional tax of 10% will generally apply to the amount that was includible in income in the year of the conversion/ rollover. The early distribution penalty generally will not apply if the distribution is made on account of death, disability (as defined by the Internal Revenue Code), a qualifying rollover, a direct transfer, the timely withdrawal of an excess contribution, or if the distribution is part of a series of substantially equal periodic payments (at least annual payments) made over your life expectancy or the joint life expectancy of you and your Beneficiary. Payments for medical expenses (under certain conditions) that are more than the applicable percentage of your adjusted gross income and distributions to pay for health insurance if you have separated from employment and received unemployment compensation under a federal or state program for at least 12 weeks are also generally exempt from the 10% tax. In addition, distributions to cover certain qualified education expenses, distributions to buy, build, or rebuild a first home (up to a lifetime maximum of $10,000), distributions due to a levy issued by the IRS, and qualified reservist distributions (as defined by the Internal Revenue Code) are also generally exempt from the 10% tax. You may have to report the 10% IRS early distribution penalty tax and/or exemption from this penalty by filing a completed Form 5329 with the IRS along with your payment.