Question

At age 50, Charles began receiving payments under a distribution method that provides for substantially equal payments over his life. He has 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

Amount of the total distribution is subject to the early distribution penalty = $0 or Nil

Explanation;

As per rule, an additional 10% tax applies to early distributions (before the participant reaches age 59½) from a retirement plan. But IRS offers penalty free early withdrawal under substantially equal periodic payment scheme, if certain conditions are fulfilled such as; If determined amount under IRS pre-approved method is taken by the taxpayer till the age of 59 ½ or 5 years whichever comes later.

As per information of the question it is given that At age 50, Charles began receiving payments under a distribution method that provides for substantially equal payments over his life. He has 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. Thus it is true that Charles completed 5 years from 50 years to 58 years hence Charles will not come under early distribution penalty of 10%. Hence overall we can say that Charles will not face any amount of early penalty.