What is the status of the 10 percent penalty tax under IRC §72(t) for distributions made prior to age 59½ regarding corrective distributions?

The 10 percent penalty tax under IRC §72(t) is not applicable to corrective distributions made from a qualified retirement plan, such as a 401(k). Corrective distributions refer to amounts that are withdrawn from the plan to rectify certain situations, such as excess contributions or failures to satisfy plan requirements.

The purpose of IRC §72(t) is to impose a penalty on early withdrawals from retirement accounts to discourage individuals from taking funds meant for retirement before reaching the age of 59½. However, the law also recognizes that there are exceptions to this general rule, particularly aimed at situations that involve correcting plan errors. Since corrective distributions are designed to adjust for compliance issues rather than to provide access to retirement funds, they are exempt from the 10 percent penalty.

This distinction is essential for plan administrators and participants to understand, as it allows for necessary corrections without incurring an additional financial burden through penalties.