Question

St age 50, Charles began receiving payments u set a distribution method that provides for substantially equal payments over his life. He had no basis in the account. At age 58, after he had received distributions totaling $14,000, he elected to receive the remaining benefits in a lump-sum of $155,000. What amount of the total distribution is subject to the early distribution penalty?

Answer 1

Since, Charles is taking the distribution at age 58 (which is lower than the eligible no penalty age of 59 1/2 years), hence, the early distribution would attract a penalty. The amount of distribution subject to early distribution penalty would be the total amount withdrawn in a lump-sum plus distribution received as part of substantially equal payments. In this case, the amount subject to penalty would be $1,69,000.

Further Explanation:

The following conditions are required to be met for non levy of penalty:

1. Continuation of distribution until the age of 59 1/2 years and minimum continuation of 5 years i.e. if the distribution starts at age 57, it must continue until age 62.

2. Amount is withdrawn on account of death or disability.

Since, in this case, the distribution is taken before age 59 1/2 years, it would attract penalty with retroactive application i.e. the amount received as distribution earlier would also be subject to penalty, hence, $155,000 + $14,000 i.e. $1,69,000 would be subject to early distribution penalty.