IRA Early Distribution Penalty Not Deductible

When you withdraw funds from a time-deposit savings account or similar deposit account before the maturity date, the bank penalty imposed on the withdrawal is deductible from gross income. This penalty reduces your adjusted gross income. However, the Tax Court has said that this above-the-line deduction does not apply to the 10% tax penalty imposed on early distributions from IRAs.

According to the court, the 10% additional tax on early distributions from IRAs and qualified retirement plans is not the penalty for premature withdrawal for purposes of the above-the-line deduction. The 10% early distribution penalty is an addition to tax. It is not an amount that is forfeited to a bank, savings-and-loan association, or similar institution as a penalty for prematurely withdrawing funds from a time savings account, certificate of deposit, or similar deposit, and so it is not tax deductible.

Source: Ollie Marie Blade, TC Summary Opinion 2010-72