A taxpayer took money from their IRA under the lifetime distribution rule, to avoid the premature distribution penalty, for two years. In the third year, they took all the remaining balance of the IRA in that year. Is the penalty based on third year withdrawal only or the total of the IRA for all three years?

According to Bill Roos, EA, premature distribution penalties are figured only on the amount reported as income in any given taxable year. Therefore, the penalty would be figured on the amount being taxed on the pension line on the tax return. When this situation happens, be sure to check all of the other penalty exceptions to see if the taxpayer inadvertently qualified to use one or more of the exceptions to the penalty.

For more helpful information on tax issues like this one, download your free copy of the Federal Tax Update: Part 2 Q&A document offered by CPE Link. As additional questions and answers are added, the document will be updated. Those who have downloaded the original document will receive all updates automatically.

Got questions?If you have more questions and would like to continue to participate in the discussion, visit CPE Link’s Discussion Forum. Log into your Facebook account to post a question.