I was wondering how I would handle this using TurboTax. It wants me to pay the tax and penalty but I paid when I took out the money. Should I just say that the amount of penalty TurboTax want me to pay is an exception in the other category?

There is no big deal. Just include the receipt for the penalty to the IRS.

What did you pay? If tax withholding was taken out, then that's not your tax, but an amount in anticipation of taxes. You add the amount withdrawn to your income to figure your total tax liability.

As for penalties, what penalties did you pay to whom. Penalties are normally paid when you file your return.

To add to what ScottGem said - you should have received a 1099-R form that states how much tax was withheld. Be sure to include that amount in your TurboTax entries. The program should walk you through how to enter all the information from your 1099-R. If you qualify for an exception for the early distribution, and yet the 1099-R lists distribution code 1 (no known exception), then the program should walk you through filing form 5329 to claim the appropriate exception and avoid the penalty. Allowable exceptions include the following withdrawal purposes:

• From a qualified retirement plan (other than an IRA) after your separation from service in or after the calendar year in which you reached age 55 (age 50 for qualified public safety employees).
• Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.) This is known as a section 72(t) withdrawal).
• Distributions due to total and permanent disability.
• Distributions due to death (you are the beneficiary of a deceased plan participant). – see IRS Pub 575 for special rules regarding distributions after a participant's death.
• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income – up to the amount allowed as a medical expense deduction.
• Distributions from a qualified retirement plan to an alternate payee under a qualified domestic relations order (does not apply to IRAs).
• Distributions due to an IRS levy of the qualified plan.
• To reduce excess employee or matching employer contributions, or to reduce excessive elective deferrals.
• Distributions to reservists while serving on active duty for at least 180 days.