What are early pension distribution exceptions?

The rule these exceptions modify

Most distributions from qualified retirement plans and nonqualified annuity contracts made before you reach age 59½ are subject to an additional 10% tax, according to Publication 575. It applies to the part of the distribution you must include in income. It does not apply to any tax-free part, such as a return of your cost or an amount you rolled over, and it does not apply to corrective distributions of excess contributions. For this purpose the qualified plans are qualified employee plans (including 401(k)), qualified employee annuity plans and 403(b) plans.

How exceptions show up on your forms

If the payer knows an exception applies, Form 1099-R box 7 should show code 2, 3 or 4 and you do not need to report the distribution on Form 5329. If an exception applies but box 7 shows code 1, early distribution with no known exception, you must file Form 5329: enter the taxable amount from box 2a on line 1 and, on line 2, the amount that can be excluded with the exception number from the Form 5329 instructions. If code 1 appears by mistake for a distribution at age 59½ or older, use exception number 12. If you owe only the 10% tax and code 1 is correct, enter 10% of the taxable part on Schedule 2 line 8 and check the box so you need not file Form 5329.

General exceptions

These apply to distributions made as part of a series of substantially equal periodic payments for your life or life expectancy, or the joint lives of you and your designated beneficiary (from a qualified plan the payments must begin after separation from service); made because you are totally and permanently disabled; made after a physician certifies you are terminally ill; or made on or after the death of the participant or contract holder.

The disability test is strict: you must be able to furnish proof that you cannot do any substantial gainful activity because of a condition a physician determines can be expected to result in death or last a long, continued or indefinite time. Terminal illness means a physician certifies an illness reasonably expected to result in death within 84 months, and the certification must include a narrative of the evidence and the physician’s details, date and signature.

Additional exceptions for qualified plans

The list for qualified retirement plans includes: distributions after separation from service in or after the year you reach age 55; for qualified public safety employees and private sector firefighters, separation in or after the year you reach the earlier of age 50 or 25 years of service; payments to an alternate payee under a QDRO; distributions up to deductible medical expenses above 7.5% of AGI, whether or not you itemize; an IRS levy; dividends on employer securities held in an ESOP; qualified reservist distributions; phased retirement annuity payments to federal employees; qualified birth or adoption distributions; domestic abuse victims; emergency personal expenses; and corrective distributions of income on excess contributions.

The age-55 exception has a trap the publication illustrates. George left his employer at 49 and took a distribution in the year he turned 55. Because he separated before reaching 55, he did not qualify. You cannot separate early and wait; you must leave in or after the year you reach the applicable age.

The newer dollar-limited exceptions

A qualified birth or adoption distribution may be up to $5,000 taken within the one-year period starting on the date of the birth or finalized adoption, and may be repaid within 3 years. A domestic abuse victim distribution must come during the one-year period beginning on a date you are a victim of abuse by a spouse or domestic partner, and cannot exceed the lesser of $10,300 or 50% of the vested benefit. An emergency personal expense distribution is limited to $1,000 per calendar year, and you generally cannot take another in the next 3 calendar years unless the first is repaid or you contribute at least as much as the unrepaid amount. A qualified reservist distribution requires active duty orders for more than 179 days or an indefinite period.

Worked example

A 52-year-old takes a $15,000 taxable distribution from a 401(k) with no exception: the additional tax is 10%, or $1,500, on top of ordinary income tax. If the same person is a qualified public safety employee who separated from service in the year she turned 50, the exception applies and the additional tax is $0, but the $15,000 is still income. Use the checker above to see the effect of an exception on your own number. The checker does not decide whether you qualify.

Limits

Exceptions to the 10% tax do not make a distribution tax free; ordinary income tax still applies to the taxable part. Some exceptions apply only to qualified plans and not to IRAs, and several have conditions this summary cannot capture. Check Form 5329 instructions and Publication 590-B for IRAs, and confirm with a tax professional.

Sources

• IRS Publication 575, Pension and Annuity Income (2025): Tax on Early Distributions; Exceptions to tax (general exceptions, additional exceptions for qualified retirement plans); Separation from service; Qualified birth or adoption distributions, domestic abuse victims, emergency personal expenses. Read November 2, 2026.

Edition read: Publication 575 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.