Blog · 16 October 2026

Early IRA Withdrawal Tax Under §72(t): Lessons from Pal and Form 5329 for US CPA Firms

By Keshav Bansal, CA

An early IRA withdrawal before age 59½ is usually ordinary income on the taxable part plus a 10% additional tax under IRC §72(t)—even when the client “just moved” the money into a regular brokerage or checking account. TaxCourtBlog’s October 7, 2026 write-up of Pal v. Commissioner, T.C. Memo. 2026-93 (Judge Lauber; docket 16983-24), shows how costly that mistake can be when a Form 1099-R with distribution code 1 goes unreported. For US CPA firms, the case is a clean checklist lesson on §72(t), Form 5329, and Schedule 2.

What Pal v. Commissioner held

According to TaxCourtBlog (David Brunk, Oct. 7, 2026), Aloke Pal—an aerospace engineer under age 59½—moved $229,857 out of his E*Trade IRA in 2021 and did not report it: $37,460 cash to a Wells Fargo checking account, $120,013 cash to an E*Trade brokerage account, and $72,384 of stock into that brokerage account. Morgan Stanley issued a Form 1099-R with distribution code 1 (early distribution, no known exception). Pal argued he did not recognize the IRA account number after the Morgan Stanley merger and that E*Trade had stolen the funds.

The Tax Court sustained the IRS Notice of Deficiency (issued August 2, 2024): an $80,292 income-tax deficiency, $22,986 of additional tax under §72(t), and a $16,058 accuracy-related penalty under §6662. Small Business Taxes & Management’s 2026 case index lists the same memorandum (T.C. Memo. 2026-93) for §§72, 6662 and 6751 issues—early distributions before 59½, failure to report income, and supervisory approval of the accuracy penalty. Memorandum decisions bind the parties; they are not cited here as binding precedent for other taxpayers.

The early withdrawal tax under §72(t)

Under 26 U.S.C. §72(t)(1), if a taxpayer receives an amount from a qualified retirement plan (as defined in §4974(c)), tax for that year is increased by 10% of the portion includible in gross income. IRS Topic no. 557 (reviewed or updated October 9, 2026) states the same rule for traditional and Roth IRAs: early distributions are generally those received before age 59½; the 10% additional tax applies only to the includible part and is in addition to regular income tax.

Moving IRA cash or stock into a taxable brokerage or checking account is a distribution, not a nontaxable trustee-to-trustee transfer or rollover. Topic 557 excepts rollovers and transfers to another IRA or qualified plan that follow the one IRA-to-IRA rollover-per-year rule—rules that do not cover parking retirement money in a personal brokerage account. Pal’s transfers fit the taxable pattern the court sustained.

Exceptions—and which ones are IRA vs. plan-only

Topic 557 lists IRA exceptions that can remove the 10% additional tax (the distribution may still be taxable as income). They include, among others: unreimbursed medical expenses above the applicable AGI floor; certain health-insurance premiums after unemployment; total and permanent disability; terminal illness; death; substantially equal periodic payments (SEPP; see Notice 2022-6); qualified higher-education expenses; up to $10,000 for a qualified first-time home purchase; an IRS levy under §6331; a qualified reservist distribution; up to $5,000 for a qualified birth or adoption; distributions to a victim of domestic abuse (Notice 2024-55); qualified disaster distributions; personal or family emergency expenses (Notice 2024-55); certain corrective distributions; and some SIMPLE/SARSEP automatic-enrollment withdrawals.

Other exceptions apply to employer plans. Topic 557 points readers to Topic no. 558 and Publication 575. Section 72(t)(2)(A)(v)’s age-55 separation-from-service exception is a classic plan-side rule—it does not rescue a pre-59½ IRA withdrawal the way a plan participant who separates after age 55 may qualify. Always match the exception to the account type before telling a client the 10% tax is off.

Form 5329, Schedule 2, and Form 1099-R code 1

Topic 557 and the Instructions for Form 5329 (2025) say the 10% additional tax is reported on Form 5329 and Schedule 2 (Form 1040). If every Form 1099-R correctly shows distribution code 1 in box 7 and the taxpayer owes the additional tax on the full amount shown, Form 5329 is not required—enter the tax on Schedule 2 and check the box indicating Form 5329 is not being filed. If an exception applies but the 1099-R code does not show it (or the code is wrong), the taxpayer must file Form 5329 with Schedule 2 to claim the exception.

That reporting fork matters for CPA review: code 1 with no exception claimed is a Schedule 2 plug; any claimed exception is a Form 5329 documentation exercise. Related Form 5329 work for missed RMDs under §4974 is a different Part of the form—see our guides on 2026 required minimum distributions and the inherited IRA 10-year rule. Year-end Roth planning that can create taxable conversions (not early-withdrawal tax when done correctly) is covered in our 2026 Roth conversion note.

Accuracy-related penalty on top of §72(t)

TaxCourtBlog reports the court also sustained the $16,058 §6662 accuracy-related penalty after the IRS showed a substantial understatement and §6751(b) supervisory approval. Forgetting a 1099-R, disputing account numbers after a custodian merger, or alleging theft without records did not establish reasonable cause in that write-up of the opinion. Firms already walking §6662 issues may cross-check our accuracy-related penalties overview; here the practical point is narrower: unreported Form 1099-R retirement income plus early-withdrawal tax can stack income tax, §72(t), and §6662 in one deficiency notice.

Preparer checklist for early IRA withdrawals

• Match every Form 1099-R — code 1 means early distribution with no known exception on the payer’s records; reconcile account numbers after custodian mergers.
• Taxable vs. transfer — IRA → taxable brokerage/checking is a distribution; only qualifying rollovers/trustee-to-trustee transfers avoid income and the 10% tax under Topic 557.
• Age and account type — under 59½ triggers §72(t) unless an exception applies; age-55 separation is generally plan-only (Topic 558 / §72(t)(2)(A)(v)).
• Exception documentation — medical, SEPP, first home ($10,000), birth/adoption ($5,000), disaster, emergency, domestic abuse, etc., need contemporaneous support; file Form 5329 when claiming an exception the 1099-R code misses.
• Schedule 2 vs. Form 5329 — code 1 and full 10% owed → Schedule 2 without Form 5329; exception claimed → Form 5329 + Schedule 2.
• Withholding / estimates — Topic 557: IRA withholding applies unless the taxpayer elects out; electing out may require estimated payments (Pub. 505).
• Penalty exposure — large omitted 1099-R amounts can support a substantial-understatement §6662 penalty on top of §72(t).

Where Tax Brew fits

Early IRA withdrawals surface in cleanup, organizer review and 1099-R matching long before anyone argues §72(t) exceptions in Tax Court. Tax Brew provides bookkeeping, cleanup and tax prep support for US CPA firms, including retirement-distribution workpapers your reviewers can rely on, with the first 20 hours free for qualifying engagements. Your firm keeps the advice and the sign-off. See our services, or email info@taxbrewglobal.com.

Sources: TaxCourtBlog (Oct. 7, 2026), Aloke Pal v. Commissioner, T.C. Memo. 2026-93 (docket 16983-24); Small Business Taxes & Management, 2026 Tax Court case index (Pal, T.C. Memo. 2026-93); IRS Topic no. 557 (reviewed/updated Oct. 9, 2026); IRS Topic no. 558; Instructions for Form 5329 (2025); 26 U.S.C. §72(t) (Cornell LII); IRS Publication 590-B. General information, not tax or legal advice.