What occurs when a distribution is made to a participant who has retired early at age 50?

When a distribution is made to a participant who has retired early at age 50, the rules surrounding early withdrawals from a 401(k) plan come into play. Generally, distributions taken from a 401(k) plan before the participant reaches the age of 59 ½ are subject to an additional 10 percent tax penalty on top of the ordinary income tax that applies to the distribution.

This additional tax is designed to discourage premature withdrawals from retirement savings, ensuring that funds are preserved for their intended purpose of funding retirement. There are certain exceptions to this penalty—such as for qualified medical expenses or disability—but retiring at age 50 does not fall into these exceptions, hence the 10 percent additional tax applies.

This context establishes the significance of understanding the tax implications tied to early distributions, highlighting why the response concerning the 10 percent additional tax is accurate.