IRA Basis Subject to 10% Penalty
A client who is 45 years old has a $100,000 IRA, of which $40,000 is after tax contributions. He withdrew $50,000 in 2009 because he was low on cash flow. With the pro rata rule, I calculate that $20,000 of his $50,000 withdrawal is not subject to income tax. My question is this…is the $20,000 subject to the 10% early withdrawal penalty? Taking out after tax IRA contributions prior to 59 1/2 does not appear to be an exception to the 10% early withdrawal penalty, but I can’t seem to find anything that says it should be included in the penalty.
Also, on line 1 of form 5329, it refers to “early distributions included in income.” What is considered “income?”
Thank you!
Permalink Submitted by Alan Spross on Tue, 2010-06-01 21:57
There is no penalty for early distributions of after tax (non deductible) IRA balances because these amounts are not to be included in your gross income. (Ref. p 53 of Pub 590). Gross Income are amounts that are included in determining AGI on Form 1040. For IRAs that amount is generated on Form 8606 with the taxable amount calculated on Form 8606 flowing to line 15b of Form 1040. Any early withdrawal penalty applies to the correct amount showing on line 15b.