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Tax on Early Distributions: Retirement Plans for Business Owners (2025 IRS Guide)

This guide covers “Tax on Early Distributions” within retirement plans for business owners. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 560 (2025), Retirement Plans for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Amounts paid to plan participants from a qualified plan are called distributions. Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Pub. 575.

Tax on Early Distributions

If a distribution is made to an employee under the plan before they reach age 59½ (early distributions), the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in gross income.

Exceptions.

The 10% additional tax won't apply to the following early distributions:

Made to a beneficiary (or to the estate of the employee) on or after the death of the employee.
Made to an employee having a disability within the meaning of section 72(m)(7).
Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and their designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)
Made from a qualified retirement plan other than an IRA to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.
Made from a governmental plan after a qualified public safety employee separates from service and has reached the earlier of age 50 or attainment of 25 years of service under the plan.
Made from a private sector plan made after a firefighter separates from service and has reached the earlier of age 50 or attainment of 25 years of service under the plan.
Made from a qualified retirement plan other than an IRA to an alternate payee under a QDRO.
Made from an IRA to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).
Timely made to reduce excess contributions under a 401(k) plan.
Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
Timely made to reduce excess elective deferrals.
Made because of an IRS levy on the plan.
Made as a qualified reservist distribution.
Made as a permissible withdrawal from an EACA.
Made as a qualified birth or adoption distribution.
Made as a qualified disaster distribution.
Made to an individual who has been certified by a physician as having a terminal illness.
Made as a distribution for a victim of domestic violence
Made as a distribution for certain emergency personal expenses.
Made from an IRA as a distribution to buy, build, or rebuild a first home.
Made from an IRA as a distribution for your qualified higher education expenses.
Timely made to reduce excess IRA contributions pursuant to section 408(d)(4).

Most of these exceptions are explained below.

Disabled.

You are considered disabled if you can furnish proof that you can't do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or be of a long, continued, or indefinite duration.

Distributions to terminally ill individuals.

You may be able to take a distribution from a retirement plan before reaching age 59½ and not have to pay the 10% additional tax on early distributions if you receive the distribution on or after the date you have received a certification by a physician that you are terminally ill.

Terminally ill individual.

You are considered terminally ill if you are certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 84 months or less after the date of the certification. See Notice 2024-02, 2024-02 I.R.B. 316, available at IRS.gov/irb/2024-02, for more information.

Separation from service.

Requirements apply for exceptions to the 10% additional tax for qualified public safety employees and private sector firefighters. You must have separated from service in or after the year in which you reach age 55 (or the earlier of age 50 or with 25 years of service under the plan, whichever is earlier). In these cases wait until you reach the applicable age or years of service, separate from service, and then take a distribution.

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 (other than an IRA) after separating from service in or after reaching age 55.

Qualified public safety employees.

If you are a qualified public safety employee, distributions that are made from a governmental retirement plan may not be subject to the 10% additional tax on early distributions.

You are a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality.

For tax years beginning after 2015, the definition of “qualified public safety employees”is expanded to include:

Federal law enforcement officers,
Federal customs and border protection officers,
Federal firefighters,
Air traffic controllers,
Nuclear materials couriers,
Members of the United States Capitol Police,
Members of the Supreme Court Police, and
Diplomatic security special agents of the United States Department of State.

Certain distributions to qualified public safety employees.

The exception to the 10% additional tax for early distributions applies to distributions made to qualified public safety employees and firefighters covered by private sector retirement plans after separation from service on or after they reach age 50 or with 25 years of service under the plan, whichever is earlier. The exception also includes distributions from an IRA, and to those employees who meet the age or years of service requirement, as described earlier, who provide services as a corrections officer or as a forensic security employee providing for the care, custody, and control of forensic patients.

Qualified reservist distributions.

A qualified reservist distribution isn’t subject to the 10% additional tax on early distributions. A qualified reservist distribution is a distribution (a) from an IRA or from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement; (b) to an individual ordered or called to active duty (because they are a member of a reserve component) for a period of more than 179 days or for an indefinite period; and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. You must be ordered or called to active duty after September 11, 2001.

Tip:

You can choose to recontribute part or all of the distributions to an IRA. These additional contributions must be made within 2 years after your active duty period ends. Any amount recontributed must be reported on Form 8606 as a nondeductible contribution. You can’t take a deduction for these contributions. However, the normal dollar limitations for contributions to IRAs don't apply to these special contributions, and you can make regular contributions to your IRA, up to the amount otherwise allowable.

Qualified birth or adoption distributions.

A qualified birth or adoption distribution isn't subject to the 10% additional tax on early distributions. An individual can receive up to $5,000 from an applicable eligible retirement plan for a distribution made during the 1-year period beginning on the date on which a child of the individual is born or the date on which the legal adoption by the individual of an eligible adoptee is finalized. For more information on qualified birth or adoption distributions, see Notice 2020-68, which is on page 567 of Internal Revenue Bulletin 2020-38 at IRS.gov/pub/irs-irb20-38.pdf.

Repayment of qualified birth or adoption distributions limited to 3 years.

If you received a qualified birth or adoption distribution after December 29, 2022, you may repay the distribution by making one or more contributions to a qualified plan during the 3-year period beginning on the day after the date on which the distribution was received.

For distributions received on or before December 29, 2022, you may repay the distribution during the period that begins after the distribution was received and ending on the date before 2026. Any contribution made to the eligible retirement plan as a repayment of a qualified birth or adoption distribution may be eligible for tax-free rollover treatment.

Distributions to victims of domestic abuse.

If you are a victim of domestic abuse, a distribution you receive while under age 59½ is not subject to the 10% additional tax if it meets certain requirements. This must be a distribution from an eligible retirement plan during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. See Notice 2024-55, available at IRS.gov/irb/2024-28_IRB#NOT-2024-55, for more information.

An eligible distribution to a domestic abuse victim must not exceed the lesser of $10,000 or 50% of the present value of the nonforfeitable accrued benefit of the employee under the plan.

Distributions for emergency personal expenses.

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. See Notice 2024-55 for more information.

Substantially equal periodic payments.

The IRS has provided three general methods of computing the annual distribution amounts for meeting the requirements for a series of substantially equal periodic payments.

The three methods are generally referred to as the “required minimum distribution method (RMD method)”, the “fixed amortization method”, and the “fixed annuitization method”.

General descriptions of these methods are as follows.

RMD method. Under this method, the resulting annual payment is redetermined for each year.
Fixed amortization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.
Fixed annuitization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.

The latter two methods may require professional assistance. For information on these methods, see Notice 2022-6 at IRS.gov/irb/2022-05_IRB#NOT-2022-06.

Note:

For a series of substantially equal periodic payments starting in 2022, you may apply the guidance either in Notice 2022-6, or in Revenue Ruling 2002-62 which is on page 710 of Internal Revenue Bulletin 2002-42 at IRS.gov/pub/irs-irbs/irb02-42.pdf.

Tip:

A change from method (2) or (3) to method (1) isn’t treated as a modification to which the recapture tax (discussed next) applies.

Tip:

Distributions received as periodic payments on or after December 29, 2022, will not fail to be treated as substantially equal merely because they are received as an annuity.

Recapture tax for changes in distribution method under equal payment exception.

An early distribution recapture tax may apply if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that wouldn’t have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period.

The recapture tax also applies after you reach age 59½ if your payments under a distribution method that qualifies for the exception are modified within 5 years of the date of the first payment. In that case, the tax applies only to payments distributed before you reach age 59½.

Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Don’t enter the explanation next to the line or enter any amount for the recapture on line 1 or 3 of the form.

Higher education expenses.

Even if you are under age 59½, if you received a distribution from an IRA and you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax (this only applies to a distribution from an IRA). The part not subject to the tax is generally the amount that isn't more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution (defined below). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.

When determining the amount of the distribution that isn't subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds.

Payment for services, such as wages.
A loan.
An inheritance given to either the student or the individual making the withdrawal.
A withdrawal from personal savings (including savings from a qualified tuition program).

Don't include expenses paid with any of the following funds.

Tax-free distributions from a Coverdell education savings account.
Tax-free part of scholarships and fellowships.
Pell grants.
Employer-provided educational assistance.
Veterans' educational assistance.
Any other tax-free payment (other than a gift or inheritance) received as educational assistance.

Qualified higher education expenses.

Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Eligible educational institution.

This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

First home.

Even if you are under age 59½, you don't have to pay the 10% additional tax on up to $10,000 of distributions you receive from an IRA to buy, build, or rebuild a first home (this exception only applies to distributions from an IRA). To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.

It must be used to pay qualified acquisition costs before the close of the 120th day after the day you received it.
It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer who is any of the following.
1. Yourself.
2. Your spouse.
3. Your or your spouse's child.
4. Your or your spouse's grandchild.
5. Your or your spouse's parent or other ancestor.
When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions can't be more than $10,000.

Tip:

If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs.

Qualified acquisition costs include the following items.

Costs of buying, building, or rebuilding a home.
Any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer.

Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Date of acquisition.

The date of acquisition is the date that:

You enter into a binding contract to buy the main home for which the distribution is being used, or
The building or rebuilding of the main home for which the distribution is being used begins.

Tip:

If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you could generally contribute the amount of the distribution to an IRA within 120 days of the distribution and not pay income tax or the 10% additional tax on early distributions. This contribution is treated as a rollover contribution to the IRA.

Reporting the tax.

To report the tax on early distributions, file Form 5329. See the form instructions for additional information about this tax.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

Publication 560 (2025), Retirement Plans for Small Business: Qualified Plans — Distributions — Tax on Early Distributions — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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