Generally, if a taxpayer is under age 59-1/2 and withdraws assets (money or other property) from a qualified plan including Traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as a penalty (IRC Sec. 72(t)). This tax is 10% of the part of the distribution that the taxpayer was required to include in gross income for the year of the distribution. Several exceptions provide relief from the early withdrawal penalty. See chapter 4.10.

For purposes of the additional tax on early distributions, an eligible governmental section 457 deferred compensation plan is treated as a qualified retirement plan, but only to the extent that a distribution is attributable to an amount transferred from a qualified retirement plan. Qualified retirement plans include: tax-sheltered annuities, qualified pension plans, profit-sharing plans, stock bonus plans, 401(k) plans, qualified annuities and IRAs.

Correctly Completing Form 5329, Part I - Enter the total distribution on line 1. On line 2, enter the amount of the distribution not subject to the additional tax. Also, on line 2, enter exception code 12. The result on line 3 is the amount of the distribution subject to the additional tax. On line 4, enter 10 percent of any amount on line 3.