Retirement Distribution Penalty Exceptions

       If during the tax year you took a distribution from your 401K or your IRA, and you did not have taxes withheld, you will probably owe quite a bit of taxes, as your distribution is taxed as ordinary income and, if you took the distribution before reaching age 59 ½ you will likely also owe a 10% penalty.   
       If you made a direct rollover from one brokerage house to another (which is generally the safest way to do it), or if you took possession of the funds and rolled it over yourself, neither the tax or the penalty will apply, until you actually decide to have the proceeds distrbutable to you.  
      So if you actually received a distribution before you were 59 1/2, you will still be responsible for the ordinary income taxes on the distribution, but you may reduce or eliminate the 10% penalty using one of these exceptions.

For either a 401K or IRA distribution:
a. If your medical expenses are over 7 ½ % of your adjusted gross income (you do not have to itemize to take advantage of this).
b. If you are totally and permanently disabled
c. If the IRS levied your account.
d. If  you take equal periodic payments over your life expectancy
e. If the distribution was made after the death of the account owner
f. If you are a qualified reservist serving on active duty for at least 180 days.
For IRAs only:
g. If  you used the amount to pay for higher education including room and board, for either yourself, your spouse or your dependent.
h. If you are a first time home buyer – a maximum amount of $10K applies here and is a lifetime limitation (each spouse if eligible).
i. If you paid medical insurance premiums and you were unemployed (see your tax advisor for details)
For 401K’s only:
j. If you separated from service of your company and if your were 55 or older (50 if you are a qualified public safety)

There are other less common exceptions, or see your tax advisor. 

NOTE: You may have requested the brokerage house to deduct income taxes from your proceeds, and they may have done so, however, because they are not aware of the rest of your tax life for that year, it may not be enough, particularly if you are married filing jointly (your spouses income would not have been considered).  Your tax liability is based on your total income.  So you should keep some of the funds in reserve in case you do owe Uncle Sam.